a. Sovereign bonds are the debt securities issued by the national or state governments.
b. These bonds are called by different names such as Bonds, Gilts, Bunds, etc. But, most commonly they are called the Treasuries. They are also called:
i. treasury bills, if they are issued with a maturity of less than a year;
ii. treasury notes, if they are issued for maturity between one and ten years; and
iii. Treasury bonds, if they are issued with a maturity of more than ten years.
But most commonly they are called treasuries or bonds.
c. The most recently issued bond is the most actively traded bond in the secondary markets. These bonds are also called ‘on-the-run’ bonds. These also act as the benchmarks for the other floating rate securities with the same features, issued around the same time.
Thus, as the treasury ages, its trading volume tends to fall.
d. Generally, the structure of the bonds issue is as follows:
i. The bonds issued for a maturity of less than a year are issued as a pure-discount (or a zero-coupon) bond.
ii. The capital market securities, with a maturity of more than a year, are issued a coupon-bearing
e. These are the unsecured bonds but carry the highest faith. These bonds are paid out of the budget surplus of the economy. If, however, there is a deficit in the economy, the payment requires a rollover of interest and principles.
f. These are theoretically considered as a ‘risk-free’ investment. These bonds enjoy the highest rating of AAA by S&P and Fitch and Aaa by Moody’s, if issued in the local currency.
If, however, these bonds are issued in foreign currency, they receive lower credit ratings.
g. The interest rates at which the bonds are issued are:
i. The sovereign bonds are issued, mostly, at a fixed rate of interest.
ii. Some countries like Germany, Mexico, etc. also issue bonds at a floating rate. The floating rate lowers the interest rate risk in comparison to the fixed-rate bonds.
iii. There are a few inflation-linked bonds or linkers as well. These are usually linked to the indices such as CPI (consumer price index), RPI (retail price index), etc. This is not a perfect hedge against inflation, as the indices only take the average of the price of a sample basket of goods.