Fixed Income I
Reading 43. Fixed-Income Markets: Issuance, Trading, and Funding
Learning Outcome Statements
e. describe securities issued by sovereign governments;
f. describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies;
CFA Curriculum, 2020, Volume 5
Subject 3. Sovereign Bonds, Non-Sovereign Bonds, Quasi-Government Bonds, and Supranational Bonds
Sovereign bonds are issued by a country's central government for fiscal reasons. They take different names and forms, depending on where they are issued, their maturities, and their coupon types. For example, U.S. government bonds with an original maturity shorter than one year are known as T-bills. The most recently issued U.S. Treasury bond of a particular maturity is known as a on-the-run issue.
Sovereign bonds are usually unsecured and are backed by the taxing authority of a national government. Credit rating agencies perform sovereign risk analysis in both local currency and foreign currency. The risk level of local and foreign currency is different. Generally, if an issuer is planning to default, it is more likely to do so with a foreign currency issue, as it has less control over foreign currency with respect to its exchange rate.
Sovereign bonds can be domestic bonds, foreign bonds, and Eurobonds. They can be fixed-rate, floating-rate or inflation-linked bonds. For example, Treasury Inflation Protection Securities (TIPS) are T-notes or T-bonds that are adjusted for inflation.
Non-sovereign bonds are bonds issued by local governments. The sources of repayment proceeds are (the):
- General taxing authority of the issuer
- Project cash flows
- Special taxes
This type of bonds receives high credit ratings due to low default rates. They often trade at a higher yield than their sovereign counterparts.
Quasi-government bonds are issued by the government through various political subdivisions. Most of them are not secured by collateral and don't have government guarantees. Their credit ratings are very high due to extremely low historical default rates.
Supranational bonds are bonds issued by supranational agencies such as the World Bank.
User Contributed Comments 6You need to log in first to add your comment.
Not so default-free now, is it?
The statement about non-sovereign bonds trading at lower yields is incorrect. A non-sovereign bond will trade at a lower price and higher yield than to that of a comparable sovereign bond.
cmacewen, the statement about non-sovereign bonds OFTEN trading at lower yields is correct. The most common non-sovereign bonds (if not the only) in the United States are municipal bonds. Interest Income from Munis are exempt from federal income taxes and, if the bondholder lives in the state of issuance, exempt from state income taxes. This tax advantage allows Local governments to issue bonds at a lower stated interest rate, and the yields typically stay lower for that reason. Think about it, if two bonds had the same YTM but the interest for bond #1 was tax exempt, nobody would buy bond #2 until the yield went up enough to offset the difference in taxes
thank you ascruggs
notes; "non-sovereign bonds often trade at a higher yield than their sovereign counterparts. "
Then why you guys are saying lower yield?
I second maryprz14's point, is it just a typo or are we missing something here?