Are the US Government Bonds Worth Investing In?

By now, we should all be aware of the downgrade in a previously sterling credit record of the United States in the estimation of Standard & Poor's, one of the world's most reliable credit rating agencies. From the highest rating of AAA (Prime), the United States has slipped down one notch to AA-plus (High Grade) - still high but a big blow to the sterling record of the US since 1917. Such downgrade is seen to adversely affect the attractiveness, so to speak, of the US government bonds.

Basic Facts About US Government Bonds

For the benefit of potential investors who have yet to dabble in government-issued bonds, these are debt instruments issued by the US Treasury - thus, the name Treasury bonds - to finance various public programs and projects.

The maturity periods of these Treasury bonds range from 20 to 30 years with varying interest rates. It must be noted that interest payments are given every six months on the treasury bonds.

Also, a differentiation must be made between government bonds and the other three United States Treasury securities, namely, the Treasury bills, Treasury notes and the Treasury Inflation Protected Securities (TIPS).

Yes and a No For US Treasury Bonds

With that being said, are the US Treasury bonds still worth investing in? Keep in mind that these bonds have historically been the lowest-risk investments in the market because the federal government was willing and able to pay for these obligations upon maturity.

The answer to the question would be a "yes" and a "no" for many reasons. On one hand, US government bonds may not be as foolproof investments as seen in previous years when the United States was on top of the global economic game. The general fear in the market is that the downgrade will scare off potential buyers of US debt instruments.

If and when it does happen, a domino effect will start. The interest rate paid on the US Treasury bonds would have to rise in order to attract prospective buyers. In turn, the borrowing rates for consumers, private companies and public agencies will be higher, too. Keep in mind that the interest rates on loans, mortgages and other debt instruments are pegged on the Treasury securities' yield.

Add in the issuance of a negative outlook report by Standard and Poor's to the mix and the investors are getting jittery, to say the least. In a way, the downgrade will make the government bonds less attractive.

On the other hand, even with the downgrade and, according to many economic experts, even without the AAA rating from credit rating agencies like Standard and Poor's (Moody's and Fitch are the other two agencies), US debt instruments have always been deemed as one of the safest investments in the global market.

One proof of such high regard for US bonds is the fact that, while the stock market was in a downward curve, the Treasury bonds were selling like pancakes and, thus, driving up the prices. The yield on these bonds fell to 2.39% from 2.75% after the downgrade was announced. Add in the reports that the Obama administration is fighting the downgrade and you have another reason to invest in Treasury bonds.

So, are government bonds worth the risk of investments despite the credit rating downgrade on the United States and despite the economic recession? We say, "yes, definitely".