Government bonds are debt securities issued by a government to support government spending. Before investing in government bonds, the investor must assess all the risks associated with the issuing country, such as political risk, inflation risk and interest rate risk, even if - generally - state have a relatively low intrinsic risk.
Government bonds from Germany and the United States are considered risk-free and are traded in highly liquid markets, but return a typically low interest rate relative to more developed countries.
The prices of government bonds are tied to interest rates, so fixed rate government bonds face interest rate risk, as fluctuations in the latter can cause the value of the bond to drop.
