Non-sovereign Governments, Quasi-government Entities, and Supranational Agencies

Non-Sovereign Bonds

Provinces, regions, states, and cities issue bonds called non-sovereign bonds or non-sovereign government bonds. These bonds are generally issued to finance schools, hospitals, highways, bridges, etc.

The national government does not guarantee non-sovereign bonds. Still, the default rates for non-sovereign bonds are low, and their credit ratings are relatively high. However, non-sovereign bonds usually trade at higher yields and lower prices than their sovereign counterparts.

Quasi-Government Bonds

National governments establish quasi-government organizations, which have both public and private sector characteristics. These entities issue quasi-government bonds or agency bonds. Some examples are Fannie Mae (Federal Mortgage Association), Freddie Mac in the US, and Hydro-Quebec in Canada. Quasi-government bonds are rated very highly due to their extremely low default rates. National governments do not guarantee these bonds, yet investors often perceive an implicit guarantee.

Supranational Bonds

Supranational agencies or multilateral agencies could issue bonds that are often highly rated. Some examples include the World Bank, the International Monetary Fund (IMF), the European Investment Bank (EIB), and the African Development Bank (ADB). Supranational bonds are generally plain vanilla bonds, meaning they pay period coupons and principal at maturity.

Question

When compared to sovereign bonds, non-sovereign bonds tend to be priced:

1. Higher and trade at a lower yield.
2. Lower and trade at a higher yield.
3. Higher and trade at a higher yield.

Solution

The correct answer is B.

Non-sovereign bonds usually trade at a higher yield and lower price than sovereign bonds.