What is a Sovereign bond?
A Sovereign bond is a government debt security sold by a national government to finance itself. These bonds are regarded as low-risk because the creditworthiness of the issuing nation supports them. The Sovereign Gold Bond Scheme (SGB) was introduced by the Government in November 2015 under the Gold Monetisation Scheme. Under the scheme, issues are made available for subscription in tranches by RBI with prior consultation with the GOI. RBI Notifies terms and conditions for the scheme from time to time. Subscriptions for SGB will be open according to the following calendar. The price of SGB will be announced by RBI prior to each new tranche by releasing a Press Release.
According to RBI guidelines, "All applications should be accompanied by the 'PAN Number' granted by the Income Tax Department to the investor(s)'' since the PAN number of the first/ sole applicant is required.
Schemes Linked with Sovereign Bonds
- Sovereign Gold Bonds (SGBs): These bonds allow investors to be issued by the Government of India, which will enable investors to invest in gold without possessing physical gold.
- Government Securities (G-Secs): The Reserve Bank of India (RBI) issues long-term bonds on behalf of the government.
- Treasury Bonds (T-Bonds): Governments globally issue long-term sovereign bonds, e.g., U.S. Treasury Bonds.
- Green Bonds: To raise funds for environmentally friendly projects.
Advantages of Sovereign Bonds
- Low Risk: Since it is backed by the government, default risk is reduced.
- Fixed Returns: Provides certain interest payments.
- Liquidity: It can be traded in secondary markets.
- Tax Benefits: Some sovereign bonds are tax-free.
- Hedge Against Inflation: Certain bonds, such as inflation-indexed bonds, protect against inflation.
Key takeaways
Sovereign bonds are government debt securities issued by the government and are low-risk, as the government backs them. The most sought-after schemes are Sovereign Gold Bonds (SGBs), Government Securities (G-Secs), Treasury Bonds, and Green Bonds. They provide fixed income, liquidity, tax advantages, and inflation-hedging. They are instrumental in raising funds for the government while offering an assured investment vehicle to investors.
