Question

How did sovereign bonds perform during the 2000s?

Answer 1

Sovereign bond is a specific debt instrument issued by government. They can be denominated in both foreign and domestic currency.To meet their expenditure,government preferred sovereign bonds to taking loans from the market.The yield of sovereign bond is the interest rate that the government pays on issuing bonds .Countries with volatile economies and high inflation rates have to issue higher interest returns on their bonds compared to more stable ones.

The yield of bonds are dependent on primarily 3 factors:-

1.Creditworthiness-The issuing countries perceived ability to re pay their debts.This can be obtained from rating agencies.

2-Country risk-External/Internal factors like unrest and wars tend to jeopardize a country's ability to pay off their debts.

3-Exchange rates-In this case where bonds are issued in foreign currency,fluctuations in exchange rate may lead to increased pay out pressure on the issuing government.

The central bank also control the supply of money with in the economy by use of these bonds.When the government is in expansionist mode,the central bank will back debt in exchange for cash to raise capital for the expenditure.In case it is in the contracting mode,the bank hope to slow growth by selling more securities to take out liquidity fro the system.