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A moderately low risk of investment is a government bond. If I understand correctly, I spend €1000 on a 5-year bond at a yield of 1%, then in 5 years I get back 1000*(1.01)**5=€1051.01, unless the government defaults on its debts, in which case I get zero. If we ignore the option of a partial default, then there are only two possibilities: either I get back exactly €1051.01, or I get back €0 (NB: Apparently my understanding is incorrect here, and I would almost certainly get a non-zero amount of money back even if the government defaults — Thanks to MD-Tech for the correction). This contrasts with stocks, where the value after five years can be anything, with a lower bound of zero and no theoretical upper bound.

I have a online banking brokerage account through which I have a small index fund investment. This account also offers the option to buy government bonds, but they all seem to fluctuate in price from daily, like stocks. This contradicts with my understanding above. It seems that the bonds are all secondhand and that price fluctuations reflect the markets estimate of a government default. That means I can buy a 30-year bond today and sell it next year, at a value which is unknown.

If my understanding is correct, how can I practically buy government bonds that behave such as described in the first paragraph? Is this even available to ordinary people, or do all government bonds get bought by major institutional traders who then resell them on a secondhand market, where they do fluctuate by price daily?

For the purpose of this question, assume I live in a Eurozone member country such as Germany, and want to buy bonds issued in Euros (so that the currency exchange risk is absent).

See also: How can I practically buy stocks?

  • Just FYI if a government defaults (and there are two types of default - technical and full) you will almost certainly get some money back and will have received the interest payments up until the time of default . If you assume that there is a 0 recovery rate then your understanding of the risks will be incorrect – MD-Tech Apr 26 at 8:21
  • @MD-Tech Thanks for the correction! I have added a note in the question (but it doesn't affect the core question I asked here). – gerrit Apr 26 at 8:27
  • that's why it was just a comment. You could ask another question about recovery rates if you'd like to know more - I'd be happy to bore you. – MD-Tech Apr 26 at 8:32
  • Instead of buying bonds individually why not buy into a bond ETF ? – DumbCoder Apr 26 at 11:38
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    Most trades in all bonds (government and corporate) are in the secondary market, and the prices fluctuate due both to default risk (which is effectively zero for most governments) and interest rate risk -- the fixed-to-par payments from a bond (still called 'coupon' though we haven't used paper for decades) make it worth more (premium) when market interest rate or expectation is lower, and worth less (discount) when market interest rate or expectation is higher, and those change from second to second. – dave_thompson_085 Apr 26 at 21:59
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If my understanding is correct, how can I practically buy government bonds that behave such as described in the first paragraph?

You seem to be essentially asking how to buy them directly from the issuer. You said assume you live in Germany but didn’t say you did so this may not apply.

In the US there is a program called Treasury Direct where one can sign up and participate in the bond auctions either with competitive or non competitive bids. One has to be a “US person” with a ssn or ein to open an individual account.

This does appear to be the site to do the same in Germany. I had trouble translating it on mobile to really verify that though. It isn’t clear whether you need to be a German citizen to use that site or if you just need to speak German or have a translator. I saw people mention they thought you needed an account with a bank in Germany to purchase bonds through the site but I couldn’t verify that either.

You may have more luck with a direct question asking how to buy bonds in the specific country you are seeking.

This appears to be the site for France.

It does also seem to be rather difficult to buy government bonds directly from a country you are not a citizen of.

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Bond prices vary based on interest rates, and how much time is left until the next payment. Risk of government default could be part of the equation, but also supply and demand.

If you buy a 30 year bond at issue and hold it until maturity, the daily fluctuations will not matter, but typically bonds are valued based on how many days until the next coupon payment, the rate of return of the coupon payment and the current risk free interest rates. Many bond traders will be borrowing money at variable rates to buy the bonds that they are holding. There are formulas for calculating this. There will also be a spread between the buy and sell price.

They will not behave like stocks in that there will be a lot of different bonds available, and not a lot of buyers and sellers in a particular bond. You might have to wait days for a marketable (priced better than the theoretical price) bond order to get filled, and some bond platforms do not give much priority to 'small' orders that might come from a retail rather than institutional investor.

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