Government Bonds or Corporate Bonds: What is More Advantageous for Private Investors
1. Yield and Income Calculation
1.1. Coupon Income and YTM
The key source of income from bonds is the coupon payments — periodic interest from the nominal value paid by the issuer. Yield to Maturity (YTM) reflects the annual return until maturity, taking into account all coupons and the difference between the purchase price. Investors can utilise an online YTM calculator or tools on trading platforms to quickly forecast yield and compare several issuances simultaneously.
1.2. Nominal and Real Yield
Nominal yield is the coupon, for example, 8% per annum. Real yield = nominal – inflation. If inflation is 5%, then the real yield from a bond with an 8% coupon will be approximately 3%. Government bonds with a floating coupon linked to the central bank's key rate automatically adjust yield, preserving the purchasing power of the investor.
1.3. Practical Calculation Example
Suppose you purchased a Government Bond – OFZ-26207 with a 7% annual coupon and a YTM of 7.5%. With a nominal value of 1,000 RUB, you will receive 70 RUB in annual coupon payments, and the additional yield of 0.5% is generated by purchasing the bond below nominal value or selling it at a premium. Over three years, the investor could earn approximately 225 RUB, excluding reinvested coupons.
2. Risk and Reliability
2.1. Sovereign Guarantee Fund
Government bonds are issued by the Ministry of Finance of the Russian Federation and are considered virtually risk-free since the government is obliged to repay the debt. During crisis periods, demand for government bonds increases, confirming investor confidence in state debt. For comparison, in 2022, turnover in government bonds on the Moscow Exchange rose by 30% amid geopolitical turbulence.
2.2. Credit Risk of Corporations
Corporate bonds entail varying levels of risk depending on the financial condition of the company. Issuers in the oil and gas sector pay coupons above 10% but are dependent on commodity prices. Banking corporate bonds rated ‘ruBBB’ offer an 8–9% coupon and exhibit low volatility due to regular cash flows.
2.3. Diversifying Credit Risk
To mitigate default risk, investors should diversify their investments among government bonds and corporate bonds from different sectors. For instance, holding half of the portfolio in government bonds and the remaining portion in securities from high-rated sectors like telecommunications, real estate, and energy.
3. Tax Aspects and Individual Investment Accounts (IIAs)
3.1. Benefits on Coupon Income
Through an IIA with Type A deduction, a private investor can reclaim up to 52,000 RUB in personal income tax (PIT) per year when investing up to 400,000 RUB in government and corporate bonds. This is equivalent to a 13% increase in yield on coupon income, which is particularly attractive for long-term investment.
3.2. Special Conditions for Corporate Paper
Within IIAs, corporate bonds are also exempt from PIT. However, it is important to adhere to the investment cap of 1 million RUB per year. Exceeding this amount nullifies tax benefits for the entire sum, so investors should plan investments, spreading them evenly across years.
3.3. Tax Optimization Strategy
Investors often utilise a combination of an IIA and a brokerage account: placing part of their funds in bonds on the IIA for obtaining deductions while directing the remaining capital to a brokerage account for high flexibility without deduction limits.
4. Liquidity and Trading
4.1. Real Transaction Stories
In early 2025, investors broadly shifted to government bond issuances after the central bank's decision to raise the key rate. The average daily trading volume of OFZ-26224 exceeded 45 billion RUB, with the spread narrowing to 0.01%. In contrast, average turnover for small corporate bond issues was only a few dozen million RUB, complicating entry and exit from positions.
4.2. Entry and Exit Tactics
For large investments, it is advisable to utilise “market” orders during peak activity hours (10:00–12:00). Smaller investors may prefer limit orders, setting prices slightly above (“bid”) or below (“ask”) the market average to reduce spread impact and commissions.
5. Maturity and Duration
5.1. Portfolio Management Tactics
If the investor expects interest rates to rise, shifting investments into shorter maturities reduces losses from price declines. Conversely, when anticipating falling rates, it is advisable to extend duration: long government bonds like OFZ-26225 with a yield of 7% could increase in value by over 3% with a 1 percentage point decrease in the key rate.
5.2. Example of Duration Impact
A portfolio with a 7-year duration will potentially lose approximately 7% in value with a 1 percentage point increase in rates, but conversely, gain the same amount should rates decrease. A duration management model assists in balancing risk and return depending on macroeconomic expectations.
6. Credit Ratings of Issuers
6.1. Sources of Information
Ratings can be found on the websites of agencies like Moody’s, S&P, Expert RA, and ACRA, as well as in brokers’ analytical sections. It is advisable to consider opinions from various agencies to obtain a comprehensive view of the risk.
6.2. Examples of Corporate Issuers
Oil and gas companies such as Lukoil and Gazprom Neft regularly attract investor attention with high ratings of ruAA and coupons of 8–9%. Banks like Sberbank and VTB offer low volatility due to stable cash flows and a rating of ruAAA.
7. Legal Support and Prospectus of Issuance
7.1. Where to Find Prospectuses
Issuance prospectuses are published on the issuers’ websites and in the “Issuers” section of the Moscow Exchange. It is essential to check for an updated version (“corrective prospectus”) to account for changes in issuance terms.
7.2. Analysis Practices for Prospectuses
When reading a prospectus, pay attention to subsections such as “Credit Enhancement”, “Prepayment Terms”, and “Issuer Responsibility”. These points contain information about collateral, prepayment options, and penalties in case of default.
8. Comparative Analysis of Government and Corporate Bonds
8.1. Mathematical Comparison of Yields
Government Bonds: 7% coupon + exemption from PIT on IIA = effective yield ~7.9%. Corporate Bonds: 10% coupon – 13% PIT → net yield ~8.7%. However, when factoring in spreads and default risks, effective yield may drop to 8%.
8.2. Behavioural Psychology of Investors
Private investors tend to overestimate the potential of high-yield instruments while underestimating the risk of default. When considering increasing yield, it is important to combine instruments from different classes and avoid excessive concentration in speculative papers.
8.3. Strategy Adaptation Tips
An optimal portfolio for the beginning investor might consist of 50% government bonds (via IIA), 30% corporate bonds rated from ruA, and 20% short-term issues (1–2 years). With improving macroeconomic conditions, the allocation to corporate securities can be increased.
9. Practical Advice for Investors
9.1. Setting Investment Goals
Identify timelines and objectives: retirement savings, building an emergency fund, or achieving yields above 8% per annum. This will influence the choice of instruments and rebalance strategy.
9.2. Diversification and Risk Management
Diversify the portfolio among government bonds, investment-grade corporate bonds, and short-term issues to reduce credit and interest rate risks. Use stop orders and limit orders to automate transactions.
9.3. Market Monitoring and Portfolio Revision
Every 3–6 months, analyse changes in the key rate, credit ratings, and trading volumes. Adjust the allocation of instruments as necessary to maintain the desired level of risk and return.
9.4. Utilising Professional Resources
Subscribe to reviews from banking analysts and rating agencies, participate in exchange webinars, and read specialised reports. Apply current data for timely decision-making and maintaining portfolio effectiveness.
