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Everything you need to know before investing in government bonds

Investing in government bonds is very attractive for savers looking for a low-risk alternative

Everyone has a list of priorities, not only in life but also in investing. Some put profitability at the top of that ranking, which leads them to choose high-risk products. Others reserve the top spot for safety, especially when their savings are at stake, and prefer to start investing in government bonds.

When you invest, you are financially supporting an initiative. In many cases, this money goes to companies, from small businesses participating in crowdlending to large multinationals listed on the stock exchange. But it is also possible to support states.

Like companies, countries need capital to finance themselves. To raise this money, they issue government bonds. Citizens buy these fixed-income securities, temporarily lending the state part of their money. And, once the term expires, not only do they receive back the original amount, but they are rewarded with a specific interest, where their profit lies.

Investing in government bonds is one of the safest alternatives today since it has the backing of an entire country. And at the same time, the products that are auctioned have a fixed yield, so the saver knows in advance what his profit will be. In this way, he keeps uncertainty at bay and is confident that his profit will not depend on market variations.

When investing in government bonds. the investor knows from the first minute that he will not face losses. Whatever happens, your profitability is assured. And this allows you to plan your investment strategies more accurately.

Bills, bonds or debentures?

When they want to start investing in government bonds, savers can choose between three different products. The way they work is practically identical: the differences lie in the time during which they cannot dispose of their money and how they are collected.

  • Treasury Bills: those who want a quick profit can opt for Treasury Bills, which operate on a short-term basis. They are issued at three, six, nine and twelve months, and interest is collected at the end of this term, sometimes ninety days.
  • Bonds: this is the intermediate option since their repayment takes place after a period of time of more than two years and less than five years. Unlike Treasury Bills, they are not cashed when the operation is completed, but the money is reimbursed to the investor through coupons, usually monthly.
  • Debentures: this alternative is only recommended for people with an economic cushion who do not need to dip into their savings in the short term. Debentures have a minimum period of five years. But some can last several decades. As far as their collection is concerned, they work the same way as Bonds, delivering interest to the saver through coupons regularly.

There is, however, another significant difference between the three alternatives. And it is one of the issues of most interest to investors: the yield of investing in government bonds. It is different for Treasury Bills than for Debentures. The further away the maturity date is, the higher the interest rate with which savers are rewarded, which is usually close to 3%.

There are three ways to start investing in government bonds: Treasury Bills, Bonds and Government Debentures.

The Treasury, a key player when it comes to investing in government bonds

Debt securities are purchased from the Treasury, the body responsible for issuing and managing them. However, it is essential to remember that the minimum amount for each request is 1,000 euros. And all higher requests will, in turn, have to be multiples of this number.

What does this mean? Anyone who wants to start investing in government bonds cannot select the amount they want but has to fit within these parameters. In other words, he cannot invest 3,500 euros but would have to change the total to 3,000 or 4,000 euros.

Likewise, you cannot buy Bills, Bonds and Debentures whenever you wish. Each year a series of auctions occur, periods where these assets are put up for sale. These dates are set at the beginning of the year, so it is necessary to check when the next auction will take place to be able to purchase these products.

There are also two different ways of investing in gobernment bonds. The first is to go directly to the Public Treasury, either by going in person to the offices of the Bank of Spain or by browsing its website, where transactions can also be made.

The other alternative is to invest in an investment fund specialized in these operations. This is a highly convenient option for individuals, as they can select their ideal risk profile and delegate management to specialized professionals who can even buy debt from different countries.

The time is up… Or it’s time to sell

The main disadvantage of investing in government bonds is that, until the term ends, it is not possible to recover the money. In products that work in a short time, this is not a disadvantage, but if you bet on government bonds and need part of the capital, it is complicated to dispose of it.

Or not. This is where the secondary market comes into play. A parallel market where you can put these securities up for sale if you don’t want to wait for the maturity date to arrive.

However, the return will be much lower, and the integrity of the investment may not be recovered so the investor may face losses. For this reason, it is not a recommendable exit unless there is a great urgency to enjoy the capital again.

Precisely, to reduce as much as possible the risk of losses when investing in government bonds, it is advisable not to gamble everything on one card, diversifying the assets in assets of different natures: public and private entities, fixed and variable yield, short and long term… In this way, if the rest are on the rise and report profits, the impact of the fall of one of them will not be a blow to the financial health of the saver.

And then it’s finally time to reap the rewards. But at this moment, the most eagerly awaited by all investors, a question may arise: how should the profits obtained from investing in government bonds be taxed?

To find out, it is enough to learn three percentages. Up to €6,000, it is taxed at 19%. From €6,000 to €50,000, it is taxed at 21%. Finally, everything over €50,000 is taxed at 23%. However, these amounts only refer to the profits that have been made and not to the total amount that is returned to the saver, as this includes their original investment.

In addition, it is possible to offset losses and gains when filing the tax return so that tax is only paid on the actual profits, putting all assets on a balance sheet.

Once the different types of products, the investment mechanisms and the most important aspects of taxation have been understood, investing in government bonds is an activity within anyone’s reach.

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