Sovereign bonds are debt instruments issued by national governments. They are one of the least risky debt instruments as they are typically backed by tax revenue and the ability of the sovereign nation to issue additional debt. They usually pay a lower yield than corporate bonds due to the stability and reliability of their collateral. Keep in mind that not all sovereign nations have favorable credit ratings, and the risk and corresponding yield will vary according to the quality of the underlying collateral.
Many sovereign governments issue what are known as inflation protected bonds, whose value is linked to an inflation related benchmark such as the consumer price index.
Similar to corporate bonds, treasury bonds trade over the counter through financial institutions known as market makers or dealers.
Like any other bond or fixed income instrument, sovereign bonds are subject to interest rate risk. The interest rate risk of the bond increases as the duration of the bond increases.
Sovereign bonds tend to be the least risky asset class, and accordingly also typically offer the lowest rate of return. They can provide a valuable addition to an investment portfolio when combined with other asset classes such as common stocks, preferred stocks, and corporate bonds.