The Hidden Risk to Sovereign Bonds

The Bundesbank dropped something of a bombshell this week. The eurozone's most influential central bank and the guardian of all things sacred to monetarists, suggested that sovereign bonds should contain clauses that would automatically delay repayment to investors for countries in financial difficulty. Not paying on schedule may not be the same as default, but it won't feel much different to bond investors. They may have to get used to it.

With almost $10 trillion of the world's debt securities paying less than zero, investors chasing ever-lower yields risk losing a ton of money if borrowing costs start to rise. But there may be an even bigger risk brewing in the fixed-income markets -- what if governments decide to cancel the bonds owned by their central banks?