Finshots Daily Are G Secs really risk free?
Mar 18, 2026
A lively look at whether government securities are truly risk free. Mechanics of credit default swaps and sovereign CDS spreads get unpacked. Scenarios where bonds fail as hedges and historic yield shocks are highlighted. Interest rate, inflation, purchasing-power and liquidity risks get called out. Practical diversification beyond stocks and bonds is suggested.
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Sovereign Debt Is Priced For Risk
- Markets never treat anything as perfectly risk-free, not even governments.
- Saudi Arabia's 5-year CDS never drops to zero and moves with oil, geopolitics and fiscal signals, showing sovereign credit risk is priced.
Risk Free Means No Default Not No Volatility
- 'Risk-free rate' in finance means absence of default risk, not absence of all risk.
- Governments can tax, borrow or print money, so default probability is low, which is why banks use G-Secs as pricing benchmarks.
When Bonds Stop Protecting Portfolios
- Bonds usually hedge equities, rising when stocks fall, which underpins the 60-40 portfolio.
- But during events like oil-driven shocks and the 1990 Gulf War yields spiked, showing bond-hedge can fail.