Sovereign 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

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 lower yield than their sovereign counterparts.

Quasi-Government Bonds

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

Supranational bonds are bonds issued by supranational agencies such as the World Bank.