Let's start by taking a look at why so many types of investors choose government bonds as part of their portfolios.

One key benefit is liquidity. Government bond markets are substantial in size and highly liquid, which means these types of bonds are traded frequently. This high level of liquidity makes it relatively easy and cost effective for investors to enter or exit positions, a significant advantage for those seeking flexibility. Another major advantage, particularly in government bonds issued by large developed economies develop is their high credit quality, or in other words, their low credit risk. These bonds are often considered virtually credit risk free, as governments have the power to increase tax revenues and in many cases can rely on their central banks as a backstop. As a result, defaults on such bonds are extremely unlikely, which adds a layer of security for investors.

This low credit risk ties into another benefit, a stable income stream. While all fixed coupon bonds offer predictable payments. For investors looking for reliable income, the stability of government bonds provides an additional level of assurance that the cash flows will be met unaffected by credit risk concerns. However, it's also worth noting that not all government bonds are low risk. While bonds from developed economies tend to have low credit risk bonds issued by emerging markets may carry higher risk due to factors like political instability and economic uncertainty. Investors in emerging market government bonds should be aware of these additional risks and may seek higher yields as compensation. It's also important to note that government bonds don't always protect against inflation. Because most government bonds pay interest at a fixed rate, the purchasing power of their income stream can diminish over time if inflation rises significantly. Investors seeking inflation protection may need to consider other asset classes or specific types of bonds, such as inflation linked bonds. Finally, government bonds offer flexibility in terms of investment horizons. Governments typically issue bonds across a wide range of maturities, so investors can often find bonds in the secondary market that align closely with their specific investment timelines.