Government Debt - Government and Sovereign Bonds

Government and Sovereign Bonds

A government bond is a bond issued by a national government. Such bonds are often denominated in the country's domestic currency. Government bonds are sometimes regarded as risk-free bonds, because national governments can raise taxes or reduce spending up to a certain point; in many cases they "print more money" to redeem the bond at maturity. Most developed country governments are prohibited by law from printing money directly, that function having been relegated to their central banks. However, central banks may buy government bonds in order to finance government spending, thereby monetizing the debt.

Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds. In the 2010 Greek debt crisis, for example, the debt is held by Greece in Euros, and one proposed solution (advanced notably by World Pensions Council (WPC) financial economists) is for Greece to go back to issuing its own Drachma.

1. Primary Market: Government Bonds are often issued via auctions at Stock Exchanges. There are several different methods of issuing such as Auctions, Guarantee, Combined Auction and Guarantee, and others. There are two main depository types: Book-Entry and Certificate. There are two different methods of the payments: at the beginning and at the end. There are two types of interest rates: Fixed and Floating.

Procedure of an auction:

a. Disclose auction information:

• Information about the bonds: interest rates, maturity year, type, and issuers (Central bank or Treasury)…

• Method of issuing

• Method of payments

b. Auction:

• Bidding interest rate

• Ceiling interest rate

• Big lot or not

• Maturity

• Disclose information of the final interest rate

c. Depository:

• Book Entry

• Certificate

d. Pre-listing

• Stock Exchanges send the information of the auction to Depository Center

e. Listing:

• At the Stock Exchanges

2. Secondary Market: The G-bonds are traded at Stock Exchanges. Unlikely equity system, the bond secondary market uses a completely different system with different method of trading. Most of the system is real time trading. At the secondary market, each bond will be assigned with very own bond code (ISIN code). There are two types of trading: Outright and Repos.