sovereign bonds

Describe securities issued by sovereign governments?

National governments or their treasuries issue bonds backed by the taxing power of the government that are referred to as sovereign bonds. Bonds issued in the currency of the issuing government carry high credit ratings and are considered to be essentially free of default risk. Both a sovereign’s ability to collect taxes and its ability to print the currency support these high credit ratings.

Sovereign nations also issue bonds denominated in currencies different from their own. Credit ratings are often higher for a sovereign’s local currency bonds than for example, its euro or U.S. dollar-denominated bonds. This is because the national government cannot print the developed market currency and the developed market currency value of local currency tax collections is dependent on the exchange rate between the two currencies.

Trading is most active and prices most informative for the most recently issued government securities of a particular maturity. These issues are referred to as on-the-run bonds and also as benchmark bonds because the yields of other bonds are determined relative to the “benchmark” yields of sovereign bonds of similar maturities.

Sovereign governments issue fixed-rate, floating-rate, and inflation-indexed bonds.