Lesson 4 of 5 · 12 min
Trading sovereign debt and benchmark bonds
Once issued, government bonds trade much like corporate bonds through dealers, but they are the most liquid bonds in their market, the newest on-the-run issues serve as benchmarks, and a large base of investors with non-economic motives lowers sovereign borrowing costs.
In short
- Sovereign bonds trade mainly over the counter (OTC) through broker/dealers, like corporate bonds; a few markets list them on an exchange.
- The sovereign is usually the largest borrower and its bonds the most liquid fixed-income securities in its market.
- On-the-run securities are the most recently issued of each maturity; they are the most liquid and are used as benchmarks. Older off-the-run issues trade less often.
- Liquid on-the-run issues increasingly trade electronically on centralised platforms run by private firms.
- Many sovereign investors have non-economic objectives: central banks (monetary policy), foreign governments (reserves), local governments (holding restrictions), banks and insurers (regulation). This lowers sovereign yields, most of all for reserve currency issuers.
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