Why government bonds have higher volatility than corporate bonds?

Answer 1

Government Bonds are issued by the US Treasury. The treasury can print money so you can always be assured that you will receive greenbacks when you redemn your bonds. The problem for investers is that the US Government is deeply in debt and has an obligation to pay Social Security and Medicare that it can't meet without borrowing more. In order to pay future obligations the US government will have to pay higher and higher interest rates. The higher rates on bonds issued in the future will diminish the market value of the bonds issued at low rates in the past. If you hold your US bonds until matuity you will receive US currency for them - but what will it buy?

Answer 2

You are probably comparing apples to oranges.

With bonds, we can talk about price volatility and interest rate volatility. Short term bonds have more rate volatility and less price volatility than either long-term treasury bonds or most corporate bonds. however, corporate bonds with no imbedded options tend to have more rate volatility and more price volatility than treasury bonds of maturities and coupons.

Most corporate bonds have imbedded options, though. These options change the level of interest rate risk (making them less sensitive to changes in rates). So -- if you compare a 30 year treasury bond to a 30 year callable corporate bond, the long treasury will have more price volatility because it does not have the option limiting its up side.

Answer 3

Corporate bonds are meant mainly for interest income. Govt bonds are only meant for capital appreciation. No one is keen on the yield, particularly since last few years it is like capital market not fixed income. For example if coupon rate is 1%. For every quarter percent increase in interest rate, bond price will go down by about 25% to compensate the yield of 1.25%.

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Answer 4

They don't! Government Bonds are guaranteed by the government and so only carry interest rate risk. Corporat ebonds carry interest rate risk and the risk of the company defaulting, so they are more volatile.