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The value of my brokerage account is $1000x (Fidelity if it matters). Looking at my balances, I see that I am afforded an additional "government bond" buying power which is about $2250x. My regular margin is only $500x. If I'm reading this right, I get to buy government bonds with collective value twice my account, on top of the stocks I bought with my actual money. Wow! Sounds like a great deal!

Of course 2.25x is a substantial amount of leverage, but aren't government bonds supposed to be extremely low risk? This is balance that I can use only for government bonds, so the choice is basically cash vs. g-bonds... And it seems like a no brainer. Why wouldn't I sink the majority (I don't want to use all of it since I'd get a margin call if my main account loses value) of my g-bond buying power into government bonds? Am I not basically wasting potential income by not using this balance? Besides the obvious risk of US Government defaulting, what am I missing?

Money Ann
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1 Answers1

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aren't government bonds supposed to be extremely low risk?

They have an extremely low risk of default, but they still have significant interest rate risk. Bond values are inversely related to interest rates, so as interest rates rise, bond prices will fall. So unless you intend to hold these bonds to maturity you still have significant risk of loss (which obviously is multiplied with leverage).

If you do intend to hold them to maturity, then you have to weight the return of the bond over the cost of borrowing, and compare that to other risk-free investments (e.g. money market)

D Stanley
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