The term government paper refers to any debt security that is backed or guaranteed by the government. Examples of government securities that are issued by different governments include bonds and treasury bills. A good example of debt security issued specifically by the United States government is the Ginnie Mae, which are issued by the Government National Mortgage Association (GNMA).
Issuance of government paper is crucial for any government’s economy. The reason for this is that governments use this instrument to raise the needed money to cover their expenses. If investors do not take up issued government paper, governments will definitely not be able to cover annual budget deficits leading to breakdown in critical government services such as health care, education, and infrastructure development. However, the take up of government paper is not really an issue since they are considered to be risk-free investments.
Government papers are considered to be risk-free investments because governments always pay up when the investments mature. Governments are able to do this consistently, even during times of economic crisis, because they have the ability to increase their revenue when needed by raising taxes. Another way governments raise money to pay for debts is by issuing more government paper, which then covers the payment for mature debts plus other expenses.
The trade off for this low risk is that interest rates for government securities are also relatively low, especially when compared to then return of investment in stocks. However, this is still a very attractive option for investors, who prefer sure money in the long run.