Should You Invest in Government or Corporate Bonds?

One of the first big choices you'll face when building the bond portion of your portfolio is deciding what kind of bonds to add. Government bonds are known for their safety and stability, while corporate bonds typically offer higher yields in exchange for a bit more risk. Understanding how these two options differ — and how they fit with your investment goals — is an important first step in building a bond strategy that works for you.

What are government bonds?

Government bonds are debt securities issued by federal, provincial or municipal governments. When you buy one, you're essentially lending money to the government in exchange for regular interest payments and the return of your money, known as your principal, at maturity.

Just like companies, countries are assigned credit ratings by independent agencies, which reflect the government’s ability to meet its debt obligations. These ratings help investors assess how safe or risky a government bond might be. Within a single country, different levels of government can also carry different credit ratings — for example, the federal government may have a higher rating than some provinces or municipalities.

In Canada, Government of Canada bonds are considered the safest. They’re backed by the federal government’s ability to tax and manage the economy, and they have virtually zero risk of default. However, that security comes at a cost: because they’re so safe, they usually offer lower interest rates than other types of bonds.

Canadian provincial bonds are generally considered quite safe and offer slightly higher yields than federal bonds. Canadian municipal bonds can carry more risk depending on the financial strength of the issuing municipality — and typically offer higher yields to reflect that.

What are corporate bonds?

Corporate bonds are issued by companies to raise capital. In Canada, frequent issuers range from large, well-known banks and telecom providers to industrial firms and utilities. When you buy a corporate bond, you're lending money to a business.

Because corporations aren’t as secure as governments, corporate bonds usually pay more interest to compensate for the added risk. Within this category, and similar to government bonds, there are also different levels of credit quality:

Investment-grade bonds are issued by financially strong companies, with a relatively lower risk of default.
High-yield bonds, also called junk bonds, are typically issued by riskier companies, offering higher yields in exchange for higher risk.
Credit rating agencies set the thresholds that divide bonds into these groups, and each bond falls somewhere along the full ratings spectrum.
Some corporate bonds are backed by company assets. These are called secured bonds, but many are unsecured debentures, backed only by the company’s promise to repay.

Government versus corporate bonds: Pros and cons

The following table summarizes key differences between government and corporate bonds.

	Government bonds	Corporate bonds
Risk level	Very low, especially federal	Higher, varies by issuer
Return (yield)	Lower	Higher
Creditworthiness	Backed by government	Depends on company health
Tax treatment	Fully taxable income	Same
Liquidity	Very liquid, especially federal	Can vary depending on the bond

How bonds can respond to the economic cycle

Some investors adjust their bond mix based on where they think we are in the economic cycle. Government bonds often perform well during recessions or periods of uncertainty, when investors prioritize safety. In contrast, corporate bonds may deliver better returns during economic expansion, when companies are healthier and default risk is lower.

However, accurately predicting the economic cycle is challenging — even for professionals. That’s why many investors maintain a diversified bond mix, or use bond mutual funds or ETFs that include various types of bonds. Some of these funds adjust their holdings based on the manager’s view of changing risks and opportunities throughout the cycle.

How to invest in government or corporate bonds

Once you understand how different bonds perform, the next step is deciding how to access them in your portfolio.

Buying individual bonds requires research, enough money to diversify and dealing with an uncertain interest rate environment. Bond ETFs or mutual funds can offer a simpler and potentially less stressful way to access a broad mix of government and corporate bonds.

Here’s why many investors choose mutual funds or ETFs.

Built-in diversification, A single mutual fund or ETF can hold hundreds of bonds, reducing the impact of any one bond’s poor performance. For example, a government bond ETF might hold dozens of federal and provincial bonds with varying maturities. A corporate bond fund might include investment-grade bonds from Canadian banks, telecom companies and utilities. Some aggregate bond funds or ETFs hold a mix of both.
Professional management. Fund managers do the research, monitor risk and adjust holdings as needed. Some actively managed funds or ETFs may shift the bond mix based on economic outlook. Not all funds do this, so it’s important to review the fund’s strategy to understand how decisions are made.
Smaller investment required. You can get started with just a few hundred dollars.
Liquidity. ETFs trade on exchanges like stocks, making them easy to buy and sell. Mutual funds can be traded daily, with pricing based on the end-of-day value.

Investors should also factor in management fees for bond mutual funds and ETFs, which can typically range from about 0.1% to 1% or more annually. Trading commissions may also apply, depending on how and where you buy this product. Bond mutual funds may also charge a short-term trading fee of 1% to 2% if you buy and sell or switch the fund within a short time period, typically up to 30 days. Check the fund prospectus or product description for details.

Which bond strategy fits your goals?

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.

Key takeaways

There’s no one-size-fits-all answer to whether you should invest in government or corporate bonds. Start by thinking about your goals, your comfort with risk, and the role you want bonds to play in your portfolio. Then decide whether individual bonds, a bond ETF or a bond mutual fund can help you get there.

Use online tools to compare features, yields and risk levels. With a bit of research, you can build a bond strategy that supports your long-term success.