SOVEREIGN DEBT YIELDS AS INDICATORS OF COUNTRY RISK, ECONOMIC SITUATION AND PROSPECTS.
A Bond is an instrument of debt with a date of maturity and an interest rate known as the yield. Whether issued by governments or corporations, it is an undertaking to return to the holder of the bond, the principal on maturity. In the meantime, the bond is traded like stocks and shares and forex in the market, and the bond’s price/yield fluctuates according to demand and supply. While it is true that the yield is determined by many factors it is also true that one of the important factors relates to an investor’s perception of the country’s trustworthiness and/or risk of default. Yields represent what the investor believes is a fair interest rate to pay for holding the bond. Look at the Table below showing the10-year bond yields of selected countries with yields arranged in descending order and you will see that this is true. Notes and clarifications • Japan’s yield is so low partly because only 13% of Japanese Government 10-year Bond is held by foreigners. There is...