Government Bond Market

Government bonds can offer another safe place to earn interest on your money. While they do not carry the same FDIC insurance that deposit accounts do, they are still backed by the governments in question. In the case of US Treasuries, the United States government is backing both the FDIC and the bond you are buying. So even though they're not technically FDIC insured, the only time the bond would be in default is if the government were insolvent, thus it is safe compared to most other type of bond investments.

Bonds are simply a form of IOU. In this case the government is offering to pay you a particular interest rate over a particular period of time. So you might buy a 30 year government bond with a yield of 3% per year. Thus the government will be paying you that 3% for 30 years, at the end of which it will return your initial investment. Of course many times people want to buy and sell these bonds in the meantime, this creates the bond market.

The government bond market can fluctuate greatly. The US government bond market is seen as a safe place to earn reasonable returns on money; so many institutional investors will buy up US bonds. Much like certificates of deposit, the yields on these bonds tend to increase with their term. During the 2008 financial crisis, for example, short term bonds were viewed as a safe haven for money, so investors looking to put their money in a safe place actually got returns of 0% on their investments.

Municipal Bonds

Municipal bonds offer an alternative to federal bonds. In these cases you can buy state or local bonds that are used to finance projects. While these bonds are not backed by the US government, municipal bonds tend to have a low default rate. Unfortunately there are a wide variety of details and terms in municipal bonds, so they are not as straightforward as many of the other types of investments.

Because of their tax treatment, however, Municipal bonds can offer an appealing alterative to other investments. These bonds are typically not subject to Federal income tax, so they can in effect yield much more than just their face value. For example if you are in a tax bracket where you pay 33% income tax, in order to match a tax-free 4% yield, you would have to get 6% on a taxed bond. This can make municipal bonds very attractive.

Buying Bonds

Bonds are not as easy to trade as stocks. Because they are not nearly as uniform, you will typically buy a bond with the aid of a bond broker. This leads to one of the downsides of investing in bonds: They require substantial research and can require considerable capital obligations. Make sure to do your research very thoroughly before investing in any kind of bond.