Government Bonds Have No Risk!
While it is common to refer to government bonds as “risk-free” securities, this may not be completely accurate. While it is true that credit risk is not a concern for most government bonds, investors who invest in a government bond are still exposed to interest rate risk – should yields rise in the interim (prior to a bond’s maturity), an investor who wants to sell a government bond in the secondary market could still realise mark-to-market losses.
In addition, sovereign credit risk is generally not an issue when investors lend to credible governments with a good track record of paying principal and interest. However, history has shown that even governments have defaulted on their debt obligations – while these cases have generally been limited to selected Emerging Market issuers, the restructuring of Greek sovereign debt may dispel the myth that all developed country sovereign debt is free from credit risk.
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