The practical difference between corporate bonds and government bonds comes down to who owes you the money. U.S. Treasury securities are backed by the federal government’s power to tax and issue currency, so default is treated as virtually unthinkable. Corporate bonds are IOUs from private companies, and some of those companies fail to pay. To compensate for that risk, corporate bonds pay higher interest. The size of that extra yield, called the credit spread, is the market’s live pricing of how risky corporate debt looks right now.
Everything else about choosing between the two flows from that one difference: safety, yield, taxes, and how predictable your income will be.
Default Risk: How Likely You Are to Get Paid Back
The federal government can raise revenue through taxation and issue the currency its debts are denominated in. That combination is why Treasuries sit at the baseline of the risk scale, and why investors use them as the yardstick for measuring risk in every other bond.
Corporate issuers don’t have those tools. A company’s finances can deteriorate, and some stop paying. Credit rating agencies like S&P Global, Moody’s, and Fitch assign letter grades that function as shorthand for default probability. Bonds rated BBB- (S&P/Fitch) or Baa3 (Moody’s) and higher are called investment grade. Anything below is called high-yield, or junk.1S&P Global Ratings. Understanding Credit Ratings
The grades translate into real numbers. S&P’s 2025 data showed a 0.00% default rate for investment-grade issuers globally, against 3.08% for speculative-grade. Within the speculative tier the spread is wide: BB-rated companies defaulted at 0.08%, B-rated at 1.18%, and CCC/C-rated at 25.90%.2S&P Global Ratings. 2025 Annual Global Corporate Default and Rating Transition Study A portfolio of CCC-rated bonds will lose roughly a quarter of its issuers in a single year. A portfolio of Treasuries will lose none.
Both types also share interest rate risk: when prevailing rates rise, the market price of an existing bond falls, and longer maturities fall harder. A Treasury investor who holds to maturity still gets paid in full. A corporate bondholder faces the rate swing on top of the chance the company stops paying.
What You Get Paid for Taking the Risk
Corporate bonds yield more than Treasuries of the same maturity. The gap is the credit spread, and it moves constantly. When investors grow nervous about corporate solvency, usually during recessions or financial stress, spreads widen. When confidence returns, they tighten.
As of late March 2026, the high-yield spread over Treasuries sat around 3.2 percentage points.3Federal Reserve Bank of St. Louis. ICE BofA US High Yield Index Option-Adjusted Spread Investment-grade spreads are typically much tighter, often in the range of 1 to 1.5 percentage points during calm markets.
Corporate bond prices also react to news about the specific issuer. A credit rating downgrade can push a bond’s price down and its yield up overnight, even if the broader economy hasn’t changed. Treasury prices mostly move on macroeconomic factors: Federal Reserve policy, inflation expectations, and global demand for safe assets.
Taxes Change Which Bond Actually Pays More
Interest from corporate bonds is taxed at every level. The IRS treats it as ordinary income taxed at your marginal rate, and state and local governments tax it on top of that.4Internal Revenue Service. Topic No. 403, Interest Received
Treasury interest gets a meaningful break. It’s still federally taxable, but federal law exempts it from state and local taxation.5Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation If you live in a high-tax state like California or New York, that exemption can make a Treasury’s after-tax yield competitive with, or even better than, a corporate bond paying a higher stated rate. Run the comparison on after-tax yield, not the headline coupon.
Municipal bonds, issued by state and local governments, go further. Interest on most municipal bonds is excluded from federal income tax entirely,6Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds and if you buy a bond issued in your state of residence, state and local taxes are often waived too. That’s why munis can offer lower stated yields than Treasuries or corporates and still win on an after-tax basis for investors in higher brackets.
Capital gains and losses work the same way for both. Sell a bond at a profit after holding it more than a year and you get long-term capital gains rates of 0%, 15%, or 20%. Sell within a year and the gain is taxed as ordinary income. Losses can offset gains, and net losses can offset up to $3,000 of ordinary income per year, with the rest carried forward.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Call Provisions and Predictability of Income
Many corporate bonds include a call provision that lets the issuer pay off the bond early. Companies call bonds when interest rates have dropped, because they can reissue at a cheaper rate. The investor gets principal back but has to reinvest it in a market where the best available yields are now lower than the bond that was just called away. You might buy a bond yielding 6%, expect to collect that income for ten years, and get called out after five when rates have fallen to 4%.
Modern Treasury securities are not callable. The last callable Treasury bonds were issued before 1985. Buy a Treasury note or bond today and you can count on the stated interest rate running through maturity, which makes cash-flow planning considerably more predictable.
Inflation Protection
Treasuries have one feature with no corporate equivalent. Treasury Inflation-Protected Securities (TIPS) adjust their principal based on the Consumer Price Index. The Treasury pays interest on the adjusted principal, so both the principal and the income stream rise when prices rise. At maturity you get whichever is greater: the inflation-adjusted principal or the original face value, which builds in a floor against deflation.8TreasuryDirect. Treasury Inflation-Protected Securities (TIPS) No comparable product exists in the corporate bond market.
How to Buy Each One
Treasuries are among the most accessible investments available. Through TreasuryDirect, the government’s online platform, you can buy bills, notes, bonds, TIPS, and floating rate notes for as little as $100 each, with no commissions.9TreasuryDirect. User Guide Sections 201 Through 210
Individual corporate bonds are harder to buy well. Most trade in $1,000 face-value increments, and a properly diversified position needs at least ten different issuers to blunt the impact of any single default. That pushes a meaningful corporate allocation into the tens of thousands of dollars, and retail investors generally get worse pricing than institutions buying in bulk.
Bond mutual funds and ETFs solve the diversification problem. A single fund holds hundreds or thousands of bonds, giving you broad exposure at any dollar amount. The tradeoff: bond funds don’t mature. If rates rise and the fund’s holdings lose value, there’s no hold-to-maturity path that guarantees you get your principal back. You sell at the fund’s current net asset value, whatever that happens to be.
Selling Before Maturity
If you might need to sell early, liquidity matters. The Treasury market is the deepest fixed-income market in the world, with transparent pricing and the ability to move large positions without pushing the price around.
Corporate bonds trade over-the-counter through a network of dealers rather than on a centralized exchange.10Federal Reserve Bank of Philadelphia. How Post-Global Financial Crisis Regulations Impact Dealer Inventories and Liquidity in the OTC Market for U.S. Corporate Bonds That means less transparency and higher transaction costs, particularly for smaller or lower-rated issues. Needing to sell a thinly traded corporate bond quickly often means accepting a price well below theoretical value. Bonds from large, well-known companies trade better, but rarely at Treasury levels.