In the current low yield environment, many Sovereign bonds issued by different countries are priced at similar levels. However, this report demonstrates that default probability estimates made by IRB banks for the same sovereigns show major differences. Using data from 2011 and 2012, this report provides a framework for pricing default risk with important implications for efficient bank and CCP risk management.

The Sovereign Bond market is the benchmark for global interest rates, and is also the most trusted and liquid form of collateral for a growing number of financing and margining transactions. Developed market Government bonds are now so highly valued that in some cases – such as Germany – investors have at times been close to having to pay to hold them.