Fixed-Income Markets for Government Issuers

In this module, we complete the review of major fixed-income sectors by focusing on public sector issuers, including sovereign and non-sovereign governments, and how they differ from private sector issuers. Sovereign governments are distinguished by their right to tax within a jurisdiction, while non-sovereign, quasi-government, and supranational issuers may rely on local taxes, fee-based revenue, or other sources of repayment. Sovereign debt issuance is usually conducted through scheduled public auctions, with a different role for financial intermediaries than in private sector issuance. Sovereign debt securities are the most common benchmark securities used in pricing and valuation analyses for fixed-income instruments.

• National or sovereign government issuers are distinguished by their legal authority to establish and maintain a country’s public goods and services, as well as their ability to tax economic activity in their jurisdictions. Developed market sovereign issues are characterized by a strong, stable, well-diversified domestic economy, and emerging market sovereign issuers are usually characterized by higher growth but less stable and less well-diversified economies subject to greater fluctuations over the economic cycle.
• Sovereign debt issues include short-term securities (with maturities ranging from 1 to 12 months), medium- and long-term notes and bonds, and bonds that are guaranteed but not directly issued by the sovereign government.
• Issuance of sovereign debt usually takes the form of a public auction using standard procedures led by the national treasury or finance ministry, while corporate debt issuances are managed by investment bank underwriters on behalf of issuers. Sovereign governments designate a group of financial intermediaries as primary dealers that are required to participate in all auctions with competitive prices.
• Once a government debt auction is announced, prospective investors submit competitive or non-competitive bids. Once issued, sovereign debt is usually traded in a manner similar to private sector debt securities, primarily in OTC markets through financial intermediary broker/ dealers.
• The level and type of non-sovereign government funding vary widely among countries, depending on whether specific goods and services are provided and financed at the national, regional, or local level.
• Agencies are quasi-government entities that issue debt in order to fund the government-sponsored provision of specific public goods or services based on sovereign or local law. Supranational organizations are created and supported by sovereign governments in pursuit of a common objective.