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CFA® Level I · Fixed Income · free lesson
Fixed-Income Markets for Government Issuers
Government bonds are the largest part of the bond market and the benchmark against which almost every other bond is priced. This module covers what makes sovereign debt special, how governments sell their bonds through auctions, taps and syndications, and how agencies, supranational organizations and regional and local governments borrow and differ in credit risk.
What you will learn
1. Describe the characteristics of sovereign debt, including the sources of repayment, the difference between local-currency and foreign-currency borrowing, and the main types of instruments.
- Sovereign bonds are the benchmark, key collateral and a monetary policy channel.
- Repayment comes from taxes and, for local-currency debt, the ability to create money; foreign-currency debt depends on earning or borrowing foreign currency.
- Local-currency sovereign ratings are usually at least as high as foreign-currency ratings.
- Currency mismatch: depreciation raises the local-currency cost of foreign-currency debt.
- Instruments: bills, notes and bonds, inflation-linked and floating-rate securities.
2. Describe how sovereign debt is issued, including regular and ad hoc auctions, single-price and multiple-price formats, tap issues and syndications, and the distinction between on-the-run and off-the-run securities.
- Regular, predictable auctions lower borrowing costs; ad hoc auctions add flexibility.
- Non-competitive bids are filled first; competitive bids are accepted from the lowest yield up to the stop-out yield.
- Single-price: all winners pay the stop-out yield. Multiple-price: each winner pays its own bid.
- Taps reopen existing bonds; syndications use banks to place large or new long-dated issues.
- On-the-run issues are the most liquid benchmarks; off-the-run issues trade at slightly higher yields.
3. Describe the debt of agency, quasi-government and supranational issuers, and explain why their bonds trade at small spreads to sovereign bonds.
- Agencies and quasi-government entities pursue public policy goals; their guarantee may be explicit or implicit.
- Agency spreads over sovereigns reflect guarantee strength, liquidity and regulatory treatment.
- Supranationals are owned by member governments; ratings rest on paid-in and callable capital and preferred creditor status.
- Supranationals issue in many currencies and lead in green and social bond issuance.
- Investors use these bonds for near-sovereign quality with a small yield pick-up.
4. Describe the debt of regional and local governments, distinguish general obligation bonds from revenue bonds, and calculate a debt service coverage ratio.
- Regional and local governments cannot create money, so they carry more credit risk than the sovereign.
- GO bonds are backed by general taxing power; unlimited-tax GO bonds are stronger than limited-tax GO bonds.
- Revenue bonds rely only on a project's revenues and usually yield more than GO bonds.
- DSCR = net revenues available for debt service / debt service; a higher ratio means more protection.
- Most US municipal bond interest is exempt from federal income tax.
Module at a glance
- Sovereign bonds are the benchmark, key collateral and a monetary policy tool.
- Local-currency sovereign debt is backed by taxing power and money creation; foreign-currency debt carries more default risk.
- Auctions: non-competitive bids first, then competitive bids up to the stop-out yield, filled pro rata at the margin.
- Single-price auctions charge all winners the stop-out yield; multiple-price auctions charge each its own bid.
- Taps build larger, more liquid issues; on-the-run bonds are the most liquid benchmarks.
- Agencies and supranationals offer near-sovereign credit with small spreads driven by guarantees and liquidity.
- GO bonds rely on taxing power; revenue bonds rely on one project's net revenues, measured by the DSCR.
This free module has 4 lessons, 13 practice questions with full explanations.