How safe are government bonds?

Government bonds are some of the least risky investments in the world. But defaults happen much more often than you might think. So, now that US and UK budget deficits are about to explode, is your money really safe?

It looks increasingly likely that the endgame in the credit crisis will be a bloody stand-off between investors and governments. Their battlefield will be the market for government bonds, where countries all around the world finance their deficits.

To see how this is likely to come about, it helps to revisit the various stages of the credit crunch. It began in 2007 with the drying-up of liquidity in esoteric, structured-finance securities, linked to riskier types of mortgages. From there it spread to more mainstream mortgage bonds, structured finance in general, and other types of debt issued by financial institutions. By early summer 2008 the crisis was affecting many non-financial corporate names, who found difficulties refinancing loans. By the end of the summer the crisis had spread to sovereign names a whole host of governments found themselves in trouble. So far the most acute problems have arisen in countries with high current account deficits Ukraine, Hungary and in Iceland, where financial sector problems threaten to overwhelm state finances.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.