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How Safe Are Bonds?

Last updated: 29 September 2026

Bonds are often regarded as comparatively safe investments. However, the actual level of safety of a bond cannot be assessed solely on the basis of its name or category.

Important factors include the issuer, its ability to meet its obligations, the term of the bond, the interest rate, any collateral, the ranking of the claim, the currency and the specific terms and conditions of the bond.

This page explains some of the basic principles and is intended to encourage readers to consider the opportunities and risks of different types of investment for themselves. It does not constitute individual investment advice.

WHAT IS A BOND?

Put simply, when investors purchase a bond, they lend money to the issuer of the bond. The investor therefore becomes a creditor of the issuer.

Under the respective bond terms, the issuer generally undertakes to pay the agreed interest and to repay the capital at a specified date.

Repayment, however, is not automatic. It depends on the issuer being able to meet its obligations and on the provisions of the respective bond terms.

This illustrates one fundamental difference between a bond and, for example, a physical precious metal: a bond represents a claim against a debtor.

WHO CAN ISSUE BONDS?

Issuers may include, for example:

sovereign states and government institutions
federal states, regions and municipalities
banks and other financial institutions
industrial, commercial and service companies
international organisations

There are therefore many different types of bonds and debt securities. These include government bonds, German federal bonds, corporate bonds, bank bonds, covered bonds such as German Pfandbriefe and subordinated debt securities.

Although all of these instruments belong to the broad category of debt financing, they can differ considerably in terms of security, ranking, collateral and risk.

BUNDESSCHATZBRIEFE AND FINANZIERUNGSSCHÄTZE – HISTORICALLY WELL-KNOWN INVESTMENTS

Many German investors may still remember the Bundesschatzbrief and the Finanzierungsschatz, forms of German federal securities that were widely known among private investors in earlier decades.

Bundesschatzbriefe were debt securities issued by the Federal Republic of Germany. New issues were discontinued at the end of 2012, and the final Bundesschatzbrief matured and was repaid in 2019. Finanzierungsschätze were likewise no longer newly issued after the end of 2012, with the remaining securities subsequently reaching maturity.

These investment products are now part of the history of German federal securities, but they illustrate the basic principle particularly clearly: investors made capital available to the state and received a contractual claim in return.

WHAT RISKS CAN BONDS INVOLVE?

The risks associated with a bond depend on its specific structure. Possible risks include in particular:

Issuer and default risk: the debtor may be unable to pay interest or repay the capital in full or on time.
Interest-rate and market-price risk: changes in general interest rates can cause existing bonds to rise or fall in market value. This is particularly relevant if a bond is to be sold before maturity.
Inflation risk: even if all interest and principal payments are made as agreed, the purchasing power of the repaid money may have declined.
Liquidity risk: some bonds have only a limited secondary market. Selling before maturity may therefore be difficult or possible only at a discount.
Currency risk: bonds denominated in a foreign currency are additionally exposed to changes in exchange rates.
Ranking and structural risk: subordinated or specially structured debt instruments may be treated very differently from senior or secured claims in a financial crisis or insolvency.

WHAT DOES A HIGH INTEREST RATE MEAN?

A high interest rate may initially appear attractive. It should, however, not be considered in isolation.

In capital markets, an above-average yield may, among other things, represent compensation for a higher perceived level of risk. A high interest rate does not automatically mean that a bond is problematic, but it may be a reason to examine the investment more closely.

Questions an investor may wish to consider include:

Who is my debtor?
How does the issuer finance itself?
How much debt does the issuer already have?
How are interest payments and repayment of principal to be financed?
Why is the issuer offering this particular interest rate?
Is the claim secured or unsecured?
What ranking does my claim have in the event of a crisis or insolvency?
Can I understand and assess the issuer's financial situation?

GOVERNMENT BONDS AND PUBLIC DEBT

The holder of a government bond is also a creditor. In this case, the debtor is the respective state.

States differ considerably from private households and companies. They have continuing tax revenues, can generally obtain long-term financing and may refinance maturing debt by issuing new bonds.

Nevertheless, government borrowing also creates interest and repayment obligations. How much importance an individual investor attaches to the level and development of public debt when assessing government bonds is a matter for that investor to decide.

GERMANY'S DEBT CLOCK

A well-known visualisation of German public debt is the Schuldenuhr Deutschlands operated by the Bund der Steuerzahler Deutschland e.V. (German Taxpayers' Association).

According to the association, official budget and debt data are used to calculate and display, among other figures, new borrowing per second, interest expenditure per second, Germany's total public debt and debt per capita.

The figures on the website are generated dynamically and change as the debt clock runs. The debt clock is not an official federal government statistic; it is a presentation by the Bund der Steuerzahler based, according to the association, on official data.

View the live German Debt Clock

Source and presentation: Bund der Steuerzahler Deutschland e.V.

“SONDERVERMÖGEN” – SPECIAL FUNDS AND DEBT

The German term “Sondervermögen” is frequently used in connection with public finances.

In everyday language, the German word “Vermögen” is generally associated with assets already owned, such as money, savings, property or other valuable assets.

In German budgetary law, however, “Sondervermögen” is a technical term for a separate budgetary entity outside the regular core budget. Such a special fund may also be financed through borrowing.

The distinction is important because a special fund does not necessarily mean that the corresponding money already exists as accumulated savings or assets.

The German Federal Ministry of Finance describes the Special Fund for Infrastructure and Climate Neutrality created in 2025 as a borrowing authorisation of up to €500 billion. Investments may be authorised over a twelve-year period from 2025 to 2036.

The required borrowing is carried out as funds are actually spent or drawn. The interest costs are borne by the federal budget, and repayment of the loans is scheduled to begin no later than 1 January 2044.

Borrowing initially creates both additional financial resources and a corresponding liability.

What remains economically opposite that liability depends on how the borrowed money is used. If it finances long-lasting infrastructure, a tangible asset or long-term economic benefit may remain after the money has been spent. If borrowed funds are consumed without creating a corresponding lasting value, the repayment obligation nevertheless continues to exist.

Whether debt-financed public expenditure creates long-term benefits sufficient to justify the associated interest and repayment costs can be assessed differently. For the assessment of a state's creditworthiness, however, the name given to a financing vehicle is not in itself decisive.

A COMPARISON WITH PRIVATE HOUSEHOLDS AND COMPANIES

The basic mechanics of borrowing can also be illustrated using a private example.

A person who borrows €50,000 initially receives an additional €50,000 of liquidity, while at the same time assuming a liability of €50,000 plus the agreed interest.

If the money is used to acquire an asset that retains lasting value, that asset at least stands opposite the liability. If the money is consumed, the money has been spent while the obligation to repay the loan remains.

A similar principle applies to companies. Debt financing may be economically useful if the borrowed funds are used to create assets or generate earnings from which interest and principal can be paid.

A sovereign state should nevertheless not be equated with a private household or a company. A state has different sources of revenue, refinancing opportunities and legal conditions and is not subject to an ordinary consumer or corporate insolvency procedure.

One principle is nevertheless common to all forms of borrowing: debt creates obligations and financing costs.

INSOLVENCIES IN GERMANY

Insolvency statistics also illustrate the practical importance of an ability to meet financial obligations. The following figures are published by the German Federal Statistical Office (Destatis):

Year	Business insolvencies	Consumer insolvencies
2022	14,590	66,428
2023	17,814	66,887
2024	21,812	71,207
2025	24,064	77,219

The number of registered business insolvencies therefore increased considerably between 2022 and 2025. Consumer insolvencies also increased over this period.

These figures do not show that excessive borrowing was the cause of each insolvency. Insolvencies can have many causes, including declining income or revenue, higher costs, unpaid receivables, business decisions, illness, unemployment or other economic developments.

The figures therefore primarily illustrate a general principle: the ability to meet existing obligations on a continuing basis is important for every debtor.

HISTORICAL EXAMPLES: WHEN CREDITORS ARE AFFECTED

History shows that payment defaults and restructurings can occur with very different types of debtors. The following examples differ considerably and should not be regarded as directly comparable. They illustrate different forms of creditor risk.

2001 – Argentina: Following a severe financial and sovereign-debt crisis, Argentina declared a broad moratorium on debt payments. Holders of government debt securities were among those affected.
2006 – Wohnungsbaugesellschaft Leipzig-West AG: The company had sold bearer debt securities to a large number of private investors. It filed for insolvency in 2006, leaving bondholders with claims in the insolvency proceedings.
2008 – Lehman Brothers: Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection on 15 September 2008. Investors holding debt issued by the company were among its creditors.
2012 – Greece: As part of the restructuring of Greek sovereign debt held by private investors, approximately 97 % of the relevant privately held Greek bonds participated in the restructuring. The face value of the affected bonds was reduced by 53.5 %.
2014 – PROKON: PROKON had raised substantial amounts of capital from private investors through participation rights (Genussrechte). These were not conventional bonds. The insolvency nevertheless illustrates that other contractual investment claims can also expose investors to issuer and creditor risk.
2016 – German Pellets: German Pellets had issued several corporate bonds as well as other investment instruments. Insolvency proceedings in 2016 also affected the company's bondholders.
2016 – KTG Agrar: KTG Agrar was unable to make an interest payment due on one of its corporate bonds and subsequently applied for insolvency proceedings. Bondholders were among the major creditor groups.
2020 – Wirecard: Wirecard AG filed for insolvency in June 2020. The collapse affected shareholders as well as banks, bond investors and other creditors.
2021 / 2024 – China Evergrande: The Chinese property group defaulted on offshore debt obligations during its financial crisis. In January 2024, a Hong Kong court ordered the liquidation of the company.
2023 – Credit Suisse AT1: In connection with the takeover of Credit Suisse, certain AT1 capital instruments were written down completely. These were specially structured subordinated capital instruments rather than ordinary senior bonds. The example illustrates the importance of ranking and contractual terms.

BONDS ARE NOT THE SAME AS SAVINGS OR TERM DEPOSITS

When assessing a bond, it is also important to distinguish between a bank deposit and a debt security.

Subject to the applicable statutory requirements, the German statutory deposit guarantee system protects certain bank deposits such as account balances, savings deposits and term deposits up to the applicable limits.

Bearer bonds and registered-to-order debt securities, however, are generally not deposits protected by the statutory deposit guarantee system.

A person holding a debt security issued by a bank is a creditor of that bank. This is legally different from holding a bank deposit that falls within the statutory deposit guarantee scheme.

BONDS AND PHYSICAL PRECIOUS METALS

Bonds and physical precious metals have different characteristics.

A bond is a claim against an issuer and may generate interest income during its term. In return, the investor is exposed, among other things, to issuer and default risk.

Physical gold, silver, platinum or palladium does not constitute a claim against an issuer. Precious metals, however, do not generate ongoing interest or dividend income and are themselves subject to price risk, differences between buying and selling prices and, where applicable, storage and insurance costs.

Which of these characteristics are more important for an individual's asset structure cannot be answered in general terms.

THE DECISION REMAINS INDIVIDUAL

Labels such as “bond”, “government bond”, “German federal security” or “corporate bond” do not in themselves provide a complete assessment of safety.

The identity of the debtor and the specific contractual terms are decisive factors.

Anyone lending money can therefore consider the same basic questions regardless of the particular investment: Who am I lending my money to? What obligations already exist? How is repayment expected to be financed? What level of risk am I prepared to accept?

The conclusion an investor reaches after considering these questions remains an individual decision.

GP METALLUM provides general information about investment structures and physical precious metals. We do not provide individual investment, tax or legal advice.