A (very) short primer on government bonds

Rational Remarks, bonds, economics

Every year when they draw up their budgets, many governments expect to take in less revenue (through taxes and so on) than they plan to spend. The shortfall has to be made up somehow, and to do this, governments usually borrow money. But even when a government’s budget balances revenues with expenditures, the government may still need to borrow for short periods during the course of the year if revenues are received and expenses are paid at different times.

When the government borrows money, it does so through financial instruments called ‘bonds’. The government sells these bonds to investors (usually banks, insurers, pension funds, and so on), who are then entitled to repayment in future. In addition, there is a broad variety of bonds; they vary according to size, maturity dates, currency, and so on.

As lenders typically do, the investors in government bonds want to have some idea about the creditworthiness of the government, that is, how likely it is they will get their money back in full, and on time.

This is where credit ratings agencies come in. These are independent firms that evaluate the creditworthiness of bond issuers (of which the South African government is one example), and the particular bonds or financial instruments that they issue.

Globally, there are three major ratings agencies: Standard and Poor’s (S&P), Fitch, and Moody’s.