Sovereign bonds are IOUs issued by national governments. When a government needs money beyond tax revenue, it borrows by issuing bonds. Investors lend money and receive regular interest payments plus the principal at maturity. US Treasuries, UK Gilts, German Bunds, and Indian G-Secs are all sovereign bonds.
The safety of sovereign bonds depends on the issuing country's creditworthiness. US Treasuries are considered risk-free (AAA-rated). German Bunds are Europe's benchmark. But bonds from countries like Argentina or Sri Lanka carry significant default risk. Argentina has defaulted on its sovereign debt nine times in history.
The global sovereign bond market exceeds $65 trillion. Central banks hold massive sovereign bond portfolios as reserves. During crises, investors flee to "safe haven" sovereign bonds — US Treasuries and German Bunds — driving their yields down. India's government bond market (Rs 100+ lakh crore) is one of the largest in Asia.