Fixed-Income Markets for Government Issuers

Sovereign governments fund themselves through taxes, tariffs, and other revenues within their jurisdiction. Non-sovereign entities, like local governments or quasi-government bodies, may rely on local taxes or specific revenue streams like fees from public services.

Sovereign debt is typically issued via public auctions managed by the national treasury, contrasting with corporate bonds issued through investment banks. Post-issuance, sovereign debts are traded similarly to corporate debts, primarily in over-the-counter (OTC) markets.

In sovereign debt markets, financial intermediaries, designated as primary dealers, are required to participate in debt auctions, ensuring competitive pricing. They play a different role compared to their function in corporate debt markets where they manage issuance on behalf of the corporate issuers.

Government fiscal policies, which include spending and tax decisions, directly influence the level and composition of sovereign debt. Debt management strategies must balance short-term and long-term obligations to optimize costs and minimize economic disruption.

This economic theory suggests that it doesn't matter whether a government finances its spending with debt or taxes because rational taxpayers will anticipate future taxes to pay off the debt and will save accordingly, making the two methods of financing equivalent in their effect on the economy.

Longer-term government securities are preferred as collateral due to their high liquidity and safety, providing security sellers with financing options and buyers with low-risk collateralized investments.

Central banks utilize government securities to execute monetary policies, such as controlling the money supply and interest rates, and to hold foreign exchange reserves, ensuring liquidity and safety.

Sovereign debt issuance typically occurs through a public auction where prospective investors submit bids. This can be a single-price or multiple-price auction, determining the cost and distribution of funds among investors.

Changes in government fiscal policies, such as budget deficits or surpluses, influence the amount and type of debt issued. Governments may alter their debt issuance strategy to manage risks associated with interest rates and refinancing.

Quasi-government entities that issue debt to fund government-sponsored public goods or services. These agencies may rely on cash flows from specific activities or government backing as secondary repayment sources.

These authorities issue general obligation bonds (GO bonds) for general purposes funded by local tax revenues, or revenue bonds for specific projects funded by project-derived revenues.

Entities like the World Bank or IMF, formed by sovereign governments to pursue common goals. They issue debt backed by member states, often enjoying high credit quality and access to capital markets.

Governments may use single-price or multiple-price auctions to issue debt. Single-price auctions, where all successful bidders pay the same price, can reduce yield volatility and are seen as more equitable.