Country Risk Premium

Previously, I was talking about the risks associated with bonds and how yield prices are constructed based on different types of risk.


I wanted to take a moment to have a peek at bonds. First is the US 10 year bond which is a proxy for the Risk Free Rate (RFR). Next, I wanted to look at the equivalent instruments available in different countries and their respective yields. If I'm not mistaken, the difference in yield prices should be accounted for by country risk only (having your bond issued by one country versus another). This should in theory account for both foreign exchange risk as well as sovereign risk.


Let's have a look:

Bond yields source: Bloomberg

A few interesting notes: While the US bond is considered risk free, there are some countries which have yields which are lower (Canada, Germany, Swedish, Swiss, and Japan). Other countries with bond yields at a premium include: Italian, Spanish and Australian. French and Dutch seem to be about par.