Government OP Sovereign Bonds

These are issued by the government involved and are either collateralized by a certain income stream that may be generated from taxes for example or from a certain facility owned by the government like an airport facility, a highway, or a water supply project. These bonds can be designed for subscription by local citizens. These bonds are called domestic government bonds, which are mostly denominated in domestic currencies, but in some other cases can be issued in international currencies like the U.S. dollar or the euro. The prospective buyers are nationals of that country. Other government bonds can be designed to attract foreign investors and can be in domestic currency or in most cases in an international currency like the U.S. dollar or the euro. In such a case these bonds are made available to investors to buy in outside international capital markets. If the bonds are issued by a sovereign government they are called sovereign bonds. In the United States, these bonds are called Treasury bonds or “Treasuries” for short. There are 1-year, 10-year, 15-year, and 30-year bonds. In addition, the U.S. Treasury issues inflation-indexed Treasuries, which are indexed to inflation in the United States. The market value of these bonds is used by market analysts as a good indicator of the perception of the financial markets about the future of inflation in the United States. U.S. Treasuries are purchased by U.S. citizens and in a large way by other world governments that have foreign currency surplus with the issuing government as in the case of China and Saudi Arabia, which accumulate significant U.S. dollar trade surpluses. An interesting reflection on the politics of such bonds was offered by the famous capitalist Steven Forbes[1] regarding the vast Chinese government holdings of U.S. Treasuries. Forbes states that “China holdings in U.S. Treasuries, which reached record levels in 2013, are setting off alarm bells. They shouldn't. They underscore that Beijing is becoming more dependent on the United States and the rest of the world for its strength and prospects.” The following are some points made by Forbes to keep in mind:

■ If the United States and Beijing ever engaged in a mortal confrontation, how much would China's holdings in American government bonds be worth if we in the U.S. government said that the paper was no longer valid? Beijing is a hostage to our U.S. government's willingness to honor these obligations.

China has not been a big buyer of U.S. government paper for several years because of its concern about the dollar's integrity.

What would happen if China, to damage us in the United States, decided to dump its trove of Treasuries? Prices might wobble, but not for long. There are trillions of dollars' worth of investors who would hunt for a chance like this.

If China sells U.S. Treasuries, it would be paid in dollars. So what? They would buy yens and euros. In this case, the Fed, in coordination with the Japanese and European central banks, will plan to keep the currency ratios in check.

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