Your choice between government and corporate bonds might depend not only on your personal goals and risk tolerance, but also on your view of where the economy is headed. For example, some investors may lean more heavily on government bonds during recessions, and shift toward corporate bonds in times of economic growth.
If you’re not confident in timing those shifts — and many investors aren’t — you might prefer to stay diversified. Aggregate bond funds or ETFs do this for you, holding a mix of government and corporate bonds. In some actively managed versions, a professional manager adjusts the allocation between government and corporate bonds based on economic outlook and market conditions.
Regardless of your views about the economy, your personal comfort with risk and your long-term goals should mainly guide your core strategy.
If you’re a cautious investor looking for maximum safety and predictability, government bonds or government bond funds may be the right fit. These options suit people who want to:
- Preserve capital. However, remember that bond ETFs and mutual funds can fluctuate in value, especially when interest rates change. Individual bonds, if held to maturity and assuming no default, return your principal — but their value may rise or fall during their lifespan. If you want the certainty of getting your original investment back, buying and holding government bonds to maturity offers the highest level of capital preservation.
- Minimize market volatility.
- Generate a stable income stream.
If you’re comfortable taking on a little more risk in exchange for higher returns, corporate bond funds may offer better income potential. These options may suit investors who:
- Are investing for the medium-to-long term.
- Want higher income than government bonds typically provide.
- Are okay with some price swings and credit risk.
Like most bonds, corporate bonds can be sold before maturity, but their value may fluctuate with changes in interest rates and market sentiment. Credit quality also plays a role: companies with lower credit ratings offer higher yields but come with more risk. Funds that hold a diversified mix of corporate bonds can help reduce company-specific risk while still aiming for attractive income.
And remember, you don’t have to choose just one. Many investors hold both types of bonds: government bonds for stability, and corporate bonds for extra yield. Bond funds and ETFs make it easy to get exposure to both in one place.