Is it worth investing in government bonds: an expert opinion
2 June 12:01
ANALYSIS
Domestic government bonds (DGBs) have become one of the most popular financial instruments among Ukrainians over the past year. These are government securities issued by the Ministry of Finance of Ukraine to raise funds for the state budget. The so-called “military government bonds” have become especially relevant, as the proceeds from these bonds are used for the needs of the Armed Forces of Ukraine. [ Kommersant asked domestic experts to share their opinions on whether it is worth investing in government bonds, what are the advantages and risks.
Tax advantages are the main argument in favor
One of the most compelling arguments in favor of domestic government bonds is their tax advantages over bank deposits. Economist Oleg Pendzin exclusively for
“When paying out income from a deposit, the bank immediately deducts 18% of personal income tax and 5% of the military fee. That is, if you declared, for example, 14.5% per annum for 3 months, the bank will charge you 23% of your profit,”
– explains the economist.
Unlike deposits, government bonds have a radically different tax structure.
“When you invest in a domestic government bond, the government gives you interest immediately without tax. That is, it is tax-free,”
– emphasizes Pendzin.
This difference in taxation creates a significant financial advantage for investors.
“That is, having the same interest rate as in a bank, you automatically save 23%. Is it profitable? Yes, it is.”
Issues of reliability and guarantees
Pendzin is optimistic about the reliability of government bonds, especially hryvnia bonds.
“The reliability of the state is much higher than that of any banking institution. Especially when you invest in the hryvnia. The state prints the hryvnia, so there is no chance that it will not give it back. There is a 100% guarantee that you will get your money back,”
– he notes.
Thus, from Pendzin’s point of view, government bonds are superior to bank deposits in terms of two key criteria: profitability and reliability.
The importance of risk assessment
Economist Oleh Ustenko emphasizes that when forming an investment portfolio, it is necessary to take into account not only the potential yield but also the associated risks.
“When building an investment portfolio, you need to consider not only the issues related to the yield you can get on an instrument. You also need to assess the risks involved in the composition of a particular instrument.”
– the economist advises readers
Ustenko explains the generally accepted classification of risks in the world of finance:
“It is believed that government securities are less risky than other investments. Accordingly, they bring less profit and have a lower yield.”
However, if we are talking about Ukrainian government securities, the risk factor is very important, because the Ukrainian state is in a war that requires critical mobilization of resources, including financial ones. Consequently, according to the same classical approaches, the risks of investing in its securities are also increasing. This explains why the Ukrainian state often has to sell its bonds at a rather high rate.
Ustenko also points out that the currency structure of bonds affects the level of risk:
“We also need to remember that we have different types of government bonds. There are those denominated in the national currency, and those denominated in foreign currency. The risk of a security denominated in foreign currency will be slightly lower than the risk of investing in a hryvnia-denominated security. Accordingly, the yield on foreign currency will be lower than on hryvnia.”
In other words, hryvnia-denominated bonds will be more profitable precisely because the Ukrainian currency is less reliable, at least in terms of exchange rate fluctuations. However, as Oleg Pendzin has already said, they are more reliable in the sense that it is the hryvnia that is printed by the state that guarantees these bonds.
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Government bonds as a tool for financing the state budget
During the full-scale war with Russia, domestic government bonds and government bonds placed on international exchanges have played a very important role in the formation of the state budget.
“Domestic government bonds are no longer just a financial and economic story. It is also a national story, a story of state support and the receipt of sources of financing for the state budget,”
– says Ustenko.
He emphasizes the critical importance of this instrument for public finances:
“If it were not for government bonds, we would not be able to cover a significant portion of our state budget deficit on our own.”
Sometimes the state may use not entirely market mechanisms in this context, the expert says.
“About half of the banking sector is in state hands. Therefore, the state can apply to banks in such a “voluntary-compulsory” form and simply force them to buy the required amount of government bonds.”
By the way, Ukraine is preparing to change the rules for trading government bonds in dollars and euros. It is planned that they can be bought and sold only through a special settlement system under the control of the National Bank. Why this is done, read in the article
Who is investing in government bonds today
Political scientist Volodymyr Tsybulko analyzes the social and psychological factors behind the growing popularity of government bonds among Ukrainians.
“First, some Ukrainians have adapted to the new conditions. The average salary has increased slightly. And people are wondering what to do with their money,”
– he explains
For those who have not noticed the growth in wealth, he notes the uneven economic situation of the population:
“Yes, consumption shows that, after all, the lion’s share of Ukrainians are poor. There is the war. But a class of new rich people has emerged. And they are trying to adapt to the new conditions by investing in government bonds, among other things.”
Trust in the state as a key factor
The political scientist believes that investing in domestic government bonds reflects the level of citizens’ trust in the state:
“Government bonds are about trust in the state in the first place.”
This statement emphasizes that the decision to buy government bonds goes beyond purely financial calculations and has a deeper socio-political context, especially in times of war.
Conclusions
The analysis of the opinions of the three experts shows different aspects of investing in domestic government bonds.
Financial benefits. Obvious tax advantages make domestic government bonds more attractive than bank deposits in terms of net return.
Risks. Like any financial instrument, domestic government bonds have their own risks that must be taken into account when building an investment portfolio.
State reliability. The state has greater ability to fulfill its obligations, especially in the national currency. However, it should be borne in mind that the national currency itself is less reliable.
Patriotic component. In times of war, investing in domestic government bonds is not only economically important, but also nationally important.
Social differentiation. The vast majority of the population has no opportunity to invest because of their difficult financial situation.
Therefore, the decision to invest in domestic government bonds should be made by each investor independently, taking into account their own financial capabilities, investment goals, and risk appetite, but expert opinion shows the advantages of this instrument in the current environment.
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