DEFINITION of 'Sovereign Bond Yield'

Sovereign bond yield is the interest rate paid on a government (sovereign) bond. In other words, it is the rate of interest at which a national government can borrow.

BREAKING DOWN 'Sovereign Bond Yield'

Because many sovereign bonds are considered risk-free, such as U.S. Treasury securities, they do not have credit risk built into their valuation, and therefore they yield a lower interest rate than riskier bonds. The spread between sovereign bond yields and highly-rated corporate bond yields is often used as a measure of the risk premium placed on corporations.

During the sovereign debt crises that have occurred in the past decades, the market began pricing in a credit premium and this increased the cost of new borrowing for these governments. Recent examples include Greece, Italy, Russia and Argentina.

Even without credit risk, sovereign bond yields are influenced by currency exchange rate risk, and local interest rates. This is especially true if governments borrow in a foreign currency (such as a country in South America borrowing in dollars). 

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