Recently, against the backdrop of rising interest rates, “government bonds for individuals” have been gaining renewed attention.
Because Japan has experienced a long period of low interest rates,
“buying government bonds hardly increases your money”
is an image many people likely hold.
However, as the interest rate environment has changed,
“I want to keep my money as safely as possible outside of savings accounts”
has become a viable option for those who think this way.
In this article, we will clearly summarize the pros and cons of “government bonds for individuals,” which are among the easiest Japanese government bonds for individuals to purchase.
What are government bonds for individuals?
Government bonds for individuals are bonds issued by the government specifically for individual investors.
Simply put,
they are financial products where you lend money to the government and receive interest in return.
There are three main types.
-
Floating 10-year
-
Fixed 5-year
-
Fixed 3-year
Each has different maturity periods and methods for determining interest rates.
The “Floating 10-year” bond, where the interest rate is reviewed every six months, is receiving particular attention recently.
In a rising interest rate environment, it has the characteristic of being well-positioned to benefit if interest rates continue to rise in the future.
Benefit 1 of Government Bonds for Individuals: Low Risk of Principal Loss
A major appeal of government bonds for individuals is that it is easy to protect your principal.
With stocks and investment trusts, prices can drop significantly depending on market conditions.
On the other hand, if you hold government bonds for individuals until maturity, you will basically receive the face value back.
Therefore,
it is a product that is easy to use as a place to keep funds if you
do not necessarily want to increase your money significantly
or want to avoid losing money as much as possible.
Benefit 2: The Peace of Mind of Government Issuance
Government bonds for individuals are issued by the Japanese government.
Of course, there is no such thing as an absolutely safe financial product.
Even so, they fall into the category of high creditworthiness among domestic financial products.
In particular,
it is an easy option to consider for those who feel
it is a bit of a waste to keep everything just in savings
but stock investment is scary.
Benefit 3: Variable 10-Year Bonds Can Respond to Rising Interest Rates
For variable 10-year bonds, the interest rate is reviewed every six months.
Therefore, if market interest rates rise further in the future, the interest you receive may also increase.
In the case of fixed-rate bonds, the interest rate at the time of purchase remains the same.
On the other hand, the 10-year floating-rate bond
tends to be advantageous during periods of rising interest rates
as a key feature.
Benefit 4: A minimum interest rate is guaranteed
Government bonds for individuals have a set minimum interest rate.
Therefore, even if market interest rates were to drop significantly, the interest will not fall to zero.
“I want to receive at least some interest while prioritizing safety”
—this is a user-friendly mechanism for people who feel this way.
Benefit 5: Can be purchased starting from 10,000 yen
Government bonds for individuals can be purchased starting from 10,000 yen.
Therefore,
“You can’t buy them unless you have a large sum of money”
—this is not that kind of product.
For example,
investing only 500,000 yen in government bonds
keeping 1 million yen in savings and 3 million yen in government bonds
—you can hold your funds in separate ways like this.
Benefit 6: Can be redeemed early after one year has passed
When you hear “10-year government bond,”
“Does that mean I can’t withdraw my money for 10 years?”
You might think so.
However, in principle, government bonds for individuals can be redeemed early once one year has passed since issuance.
Although a certain amount of interest equivalent is deducted upon early redemption, the principal amount is generally protected.
Therefore, it has the advantage that
it is easy to use even for those who do not want to lock up their funds completely for a long period of time
.
On the other hand, government bonds for individuals also have disadvantages.
Just because they are highly safe does not mean you should put all your money into government bonds.
Let’s look at the disadvantages from here.
Disadvantage 1: It is difficult to expect significant growth.
The biggest weakness of government bonds for individuals is that you cannot expect large returns.
Stocks and investment trusts have the potential for significant asset growth over the long term.
On the other hand, while government bonds are highly safe, the expected returns are relatively low.
In other words, it is easier to think of
government bonds as a product for ‘protecting’ rather than ‘growing’ assets
.
Disadvantage 2: There is a possibility of losing out to inflation.
For example,
The yield on government bonds is 2% per year.
The inflation rate is 3% per year.
In that case, even if your deposited money has increased, your actual purchasing power will have decreased.
Even if 1 million yen becomes 1.02 million yen, if prices have risen more than that,
the amount of things you can buy will have decreased
is the state you will be in.
Therefore, you should also be careful about managing all assets that will not be used for a long time, such as retirement funds, solely through government bonds.
Disadvantage 3: Generally cannot be redeemed for the first year
As a general rule, government bonds for individuals cannot be redeemed early for one year after purchase.
Therefore,
living expenses,
sudden medical expenses,
funds for replacing a car,
home repair costs,
and other money that might be needed immediately should ideally not be put into government bonds.
It is important to keep emergency reserve funds needed for daily life as deposits.
Disadvantage 4: Early redemption reduces interest
Although you can redeem them after one year has passed, a certain amount equivalent to interest will be deducted upon early redemption.
In other words,
it is not the case that you can cancel at any time completely without penalty.
It is not.
For money that is highly likely to be used in the short term, there are cases where ordinary savings accounts or similar options are easier to use.
How do you choose between the ’10-Year Floating,’ ‘5-Year Fixed,’ and ‘3-Year Fixed’ options?
The logic is simple.
10-Year Floating
For those who believe interest rates may rise further in the future.
The interest rate is reviewed every six months.
5-Year Fixed
For those who want to secure the current interest rate for five years.
3-Year Fixed
For those who want to invest for a relatively short period.
In situations where future interest rate trends are difficult to predict, one approach is to consider the 10-Year Floating option, which can adapt to rising rates.
Government bonds are like something between savings and investments.
When considering government bonds for individuals, it is also important to
not put all your money into a single product
.
For example:
Living expenses and emergency reserve funds
→ Savings
Money that might be needed within a few years
→ Government bonds for individuals
Money that will not be used for 10 or 20 years or more
→ Stocks and Investment Trusts
In this way, there is a method of separating money based on when you plan to use it.
Personally, I think government bonds for individuals are
“not enough with just savings, but I don’t want to take as much risk as with stocks”
a very easy-to-use place to park money for those who feel that way.
Summary
With interest rates rising, government bonds for individuals, which have not received much attention until now, have become more attractive.
The advantages are
that it is easy to protect the principal,
that they are issued by the government,
that they can be purchased in small amounts,
and that they can be redeemed early after a certain period.
is.
On the other hand,
it is difficult to expect large returns,
there is a possibility of losing to inflation,
and they cannot be redeemed immediately.
are also disadvantages.
What is important is
not whether government bonds are good or bad, but when you will use that money.
to think about.
In asset management, the goal is not just to increase your money.
“Protecting money you plan to use” is also a fine form of asset management.
Isn’t it important to understand the characteristics of savings, government bonds, investment trusts, etc., and allocate your money according to its purpose?