What Are Some Pros and Cons of Government Bonds?

Government bonds are among the safest investments, are highly liquid, pay higher and more frequent dividends than other relatively safe investments, and are sometimes exempt from state and local taxes, according to Bankrate. However, they can fluctuate in value due to interest rate fluctuations and inflation, and do not provide as high a rate of return as other investments.

Government bonds are very safe investments because they are debt instruments issued by the government, according to U.S. News & World Report. They are particularly advantageous for retirees, who depend on investments that provide reliable income. Some bonds pay dividends monthly.

However, government bonds lose value when interest rates and inflation rise. They are not good investments for short-term investors during periods when interest rates are low, such as the years immediately following the financial crisis of 2007, because the bonds lose value when rates inevitably rise, notes Investopedia. Additionally, the bond prices rise during such times of financial crisis as investors seek out safe investments, further eroding their rate of return.

Government bonds are not good investments for people who are focused on achieving a high rate of return on their investment, such as people who need to accumulate a large amount of wealth before retiring, explains U.S. News & World Report.