Sovereign bond

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 among the safest investments known and others, such as the bonds of many developing nations, are considered highly speculative.

During the early 1980s, sovereign bonds were a popular investment for Western banks. These created many problems when 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. Hence situations when a nation defaults can be extremely complicated. Common practice has been that the government 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.

Bonds issued by the UK government are called gilts.