What is a Government Security?

In the investing world, "government security" applies to a range of investment products offered by a governmental body. For most readers, the most common types of government securities are those items issued by the US Treasury in the form of Treasury bonds, bills, and notes. However, the governments of many nations will issue these debt instruments to fund necessary ongoing operations.

Government securities come with a promise of the full repayment of invested principal at maturity of the security. Some government securities may also pay periodic coupon or interest payments. These securities are considered conservative investments with low risk since they have the backing of the government that issued them.

Government securities are debt instruments of a sovereign government. They sell these products to finance day-to-day governmental operations and provide funding for special infrastructure and military projects. These investments work in much the same way as a corporate debt issue. Corporations issue bonds as a way to gain capital for buying equipment, funding expansion, and paying off other debt. By issuing debt, governments can avoid hiking taxes or cutting other areas of spending in the budget each time they need additional funds for a project. After issuing government securities, individual and institutional investors will buy them to either hold until maturity or sell to other investors on the secondary bond market. Investors buy and sell previously issued bonds in the market for a variety of reasons. They may be looking to earn interest income from the bond's periodic coupon payments or to allocate a portion of their portfolio into conservative risk-free assets. These investments are often considered risk-free because when it comes the time for redemption at maturity, the government can always print more money to satisfy the demand. As already mentioned, the United States is only one of many countries that issues government securities to fund operations. U.S. Treasury bills, bonds, and notes are considered risk-free assets due to their backing by the American government. Italy, France, Germany, Japan, and many other nations also float government bonds.

However, government securities issued by foreign governments can carry the risk of default, which is the failure of paying back the principal amount invested. If a country's government collapses or there's instability, a default can occur. When purchasing foreign government securities, it's important to weigh the risks, which can include economic, country, and political risks.

As an example of such default risk, one needs to look no further than 1998 when Russia defaulted on its debt. Investors were shocked by their losses as the country devalued the ruble. This downturn came on the heel of—and was in some part brought about by—the Asian financial crisis of the same decade. The Asian crisis was a series of currency devaluations by many nations throughout Asia that sent shock waves around the financial globe.

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