Government bonds are debt instruments issued by the federal government to finance its operations. They are considered one of the safest forms of investment. This guide not only describes the types of bonds available, but also explains how they work, how they generate returns, and how you can use them in investment or trading strategies to take advantage of interest rate movements or build diversified and resilient portfolios.
What is a government bond and how does it work
A government bond is a debt instrument. When you purchase a bond, you are lending money to the federal government in exchange for receiving interest at defined intervals and the return of your principal at maturity. They are considered low-risk assets because they are backed by the government's ability to meet its payments.
All bonds have three key components: face value, interest rate, and term. The face value is the base amount that is returned to you at the end of the term. The interest rate can be fixed (like in M Bonds) or variable (like in Bondes). The term defines when you will receive your money back. Some bonds are purchased at a discount (Treasury bills), others pay periodic interest (M Bonds, BPA bonds), and some adjust their value for inflation (Inflation-linked bonds, BPA182).
Types of returns generated by bonds
Fixed interest: same payment each semester or month (M Bonds, BPAG28).
Variable interest: adjusted according to market rates (Bondes, BPAG91).
Real interest: adjusted for inflation, paid on the inflation index value (Inflation-linked bonds, BPA182).
Discount gain: buy at a lower price and collect the full value at the end (Treasury bills).
These instruments can be part of a savings, investment, or inflation protection strategy, and can also be sold before maturity in the secondary market for trading purposes.
Types of Government Bonds: Treasury Certificates, Bonds, and Inflation-Linked Bonds
There are multiple government instruments with different characteristics:
Treasury Certificates: These do not pay periodic interest; they are purchased at a discount and repay a set amount at maturity. Available in terms of 28, 91, 182, 364, and 728 days.
Fixed-Rate Bonds: Pays fixed interest every six months and the principal at the end of the term (3 to 30 years). Ideal for consistent cash flows.
Variable-Rate Bonds: 5-year term. Pay variable interest every 28 days based on the interbank funding rate.
Flexible Variable-Rate Bonds: Similar to variable-rate bonds but with terms from 1 to 5 years and monthly payments. Greater flexibility.
Inflation-Linked Bonds: Issued in inflation-adjusted units, pay a fixed rate every six months plus inflation adjustment. Excellent for preserving purchasing power.
Monthly, Quarterly, or Semi-Annual Interest Bonds: Pay monthly, quarterly, or semi-annual interest. Referenced to Treasury Certificates and offer protection against inflation or high rates.
Each bond has particular advantages depending on your investment horizon, risk tolerance, and cash flow needs.
Quick Comparison
For maximum liquidity: 28 or 91-day Treasury Certificates.
For fixed income: Fixed-Rate Bonds or Monthly Interest Bonds.
For protection against inflation: Inflation-Linked Bonds or Semi-Annual Interest Bonds.
To follow market rates: Variable-Rate and Flexible Variable-Rate Bonds.
You can access all these instruments through brokerage firms.
Investment Strategies and Trading with Bonds
Government bonds are not just for passive investment; you can also use them strategically to maximize returns, protect your portfolio, or take advantage of market movements. Here’s how.
1. Ladder Strategy: Invest in various maturities (e.g., 28, 91, 182, 364) so that you have maturities coming up regularly. This provides constant liquidity and allows you to reinvest at better rates.
2. Inflation Hedge: If you think prices will rise, Udibonos and BPA182 are the best defense as they adjust the value based on the UDIs.
3. Rate Trading: The prices of Bonos M, Bonds, and CETES rise or fall based on interest rate expectations. If you buy when rates are high and then they drop, your bond's value increases. You can sell it in the secondary market for a profit before maturity.
4. Carry Trade in BPAs: In high-rate environments, BPAG28 and BPAG91 pay well and are low risk. They can be part of a strategy to generate frequent income without compromising your capital.
5. Long-term Bonds for Distant Goals: If you're saving for retirement or long-term education, Bonos M with 10, 20, or 30-year maturities offer predictable flows and low risk. You can also use Udibonos to shield against future inflation.
Additional Tips for Investors
Check the rates published weekly by central banks and financial platforms.
Diversify among bonds with fixed, variable, and inflation-indexed rates.
Consider the bond's liquidity if you plan to sell before maturity.
Consider taxes: interest is subject to income tax.
Avoid buying bonds during low-rate periods if you plan to resell them: their price might drop.
With financial education and tools, government bonds become a strategic pillar of your portfolio rather than a boring asset. You can use them to generate income, protect your money, and make tactical moves if you understand how they relate to market rates.
