Sovereign bond

A sovereign bond is a government  bond which is issued by the government that controls the currency in which the bond is denominated.

For examples, the United States is the sovereign debt issuer of United States dollars, and likewise the United Kingdom issues bonds only in pounds sterling.

Because issuers of sovereign bonds control the currency they need never default on the debt - they can always create money with which to repay creditors. But issuers of bonds must sell them at auction on the open market and investors decide how much they are prepared to pay for the bond, so the yield of sovereign bonds has a relationship with the currency's expected rate of inflation.

Counties with less stable currencies will be forced to issue bonds in hard currencies as well as their own and those bonds carry the risk of default. In the past this has happened in, for example. Argentina and Greece and has required the intervention of the International Monetary Fund.

Category:Finance