Sovereign Bonds

What are Sovereign Bonds?

Sovereign bonds are bonds issued by governments. These bonds can be issued in the country’s local currency or in a foreign currency. The proceeds from issuing sovereign bonds are used by governments to fund the country’s infrastructure projects and/or to fund the government’s budget deficit.

Just like any other bonds, sovereign bonds pay coupon or interest at fixed regular intervals and payback principal on the maturity date.

Sovereign debt issued by the United States of America are called US Treasury debt. Treasuries with a maturity of:

  • One year or less are called Treasury bills
  • Between two and ten years are called Treasury notes
  • Between 10 and 30 years are called Treasury bonds

US Treasury yields are tracked very closely by bond investors worldwide as they act as a benchmark for all US dollar denominated bonds.

The most commonly tracked Treasury yields are the 3-month Treasury yield, 2 year Treasury yield, 10 year Treasury yield and 30 year Treasury yield.

In particular the 10 year Treasury yield is the most commonly tracked Treasury yield as that is considered to be a benchmark for US government bonds.

Other commonly tracked government bond yields are yields of Japanese government bonds (JGBs), German government bonds (bunds) and UK government bonds (UK GILTs).

Since USD is the dominant currency for international trade. Many emerging market governments choose to issue sovereign bonds denominated in USD. The proceeds from these bonds are typically used to fund the country’s imports, which are billed in USD.

Some of the most common issuers of USD sovereign bonds are:

  • Republic of Indonesia
  • Republic of The Philippines
  • Kingdom of Saudi Arabia
  • State of Qatar
  • Republic of Turkey
  • Republic of South Africa
  • Democratic Socialist Republic of Sri Lanka
  • Federation of Russia
  • Kingdom of Bahrain

It is important to note that each sovereign bond’s risk is linked to the creditworthiness of that country’s government.

Investors can understand the creditworthiness of a country by looking at it’s credit rating, which is assigned by the 3 dominant rating agencies – S&P, Moody’s and Fitch.

These credit ratings can be used to compare the risk attached to different bonds with AAA being the highest and D being the lowest credit rating.

The credit rating for the United States is AA+, which makes sovereign bonds from US i.e.

Treasury bonds one of the safest sovereign bonds in the world. This is the reason why Treasury bond yields are low compared to other sovereign bonds.

The current 10 year Treasury yield is 1.81% as on 15th January 2020.

This means that investors can expect an annual return of 1.81%. If they invest in the 10 year US Treasury bond.

On the other hand, the credit rating of Sri Lanka is B, which makes its sovereign bonds more risky.

The increased credit risk associated with Sri Lankan.

sovereign bonds is the reason why the yield on a 10 year Sri Lanka

Sovereign bond is 7.5% (Sri Lanka 7.55% bond due 2030).

Thus investors must review the credit ratings of the sovereign bonds carefully before making an investment decision.

Also Read –  Eurodollar bonds

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