Sovereign Rates

The rate at which the market is willing to lend money to the Government is the sovereign rate. It is an indication of sovereign risk. Low rates mean low risk and vice-versa. Investors want a higher return on their investment to reflect the risk.

The Fed Funds rate and the price of government pays to borrow money are linked, because of the opportunity cost of the price of money. If interest rates are very low at the bank (e.g. 0.1%) but an investor can get 5% by lending the same money to the government they will buy government bonds. If everyone is thinking the same the price of bonds will rise and the bond yield will fall. The benchmark bond is the 10 Year Treasury note.

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