Sovereign bonds - Definition and Overview

A sovereign bond is a bond issued by a national government as opposed to a municipal bond which is issued by a subdivision of a national government. The risk of sovereign bonds varies widely with some bonds such as United States treasury bonds being considered the safest US dollar investment known and others, such as the bonds of many developing nations, are considered highly speculative.

During the early 1980s, the sovereign bonds of developing nations were a popular investment for Western banks. These created many problems when some nations found it difficult to repay those bonds.

Sovereign bonds present unique issues. Unlike a corporation or even a municipal subdivision, a nation cannot file for bankruptcy. But when a default occurs, just as in defaults on corporate bonds, common practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in Peru (1996) and Argentina (2001). However, getting the bond holders to accept an exchange offer has become very difficult, something caused by the holdout problem.

Of course, default is very unlikely where a nation issues its bonds in its own currency as the government can simply print more of its own money if required. The Argentinian and Peruvian defaults were in bonds denominated in US dollars.

Bonds issued by the UK national government are called gilts.

See also

• Government debt