A sovereign bond is a bond issued by a national
government as opposed to a municipal
bond which is issued by a subdivision of a national government.
The risk of sovereign bonds varies widely with some bonds such as
United States treasury bonds being considered among the safest investments
known and others, such as the bonds of many developing nations,
are considered highly speculative.
During the early 1980's, sovereign bonds were a popular investment for Western banks. These created many problems when nations found it difficult to repay those bonds.
Sovereign bonds present unique issues. Unlike a corporation or
even a municipal subdivision, a nation cannot file for bankruptcy.
Hence situations when a nation defaults can be extremely complicated.