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A piece I want to add to WIP/TIP articles about the safety of sovreign bonds

About Debt Ratings:

1. Being rated AAA does not mean risk-free. (given past actions of ratings agencies this is an accurate statement) It just means it is Less Risky than AA or A.
2. Within the same country, Sovereign Debt is always LESS RISKY than corporate debt
3. Bonds have four risks: inflation, currency fluctuations, devaluation and default.
4. Inflation-protected bonds protect you against inflation, and to a lesser extent against devaluation (because devaluation stimulated inflation). Because of this, inflation-protected bonds are less risky than nominal bonds (same issuer)
5. Diversification lowers risk: A diversified portfolio of sovereign bonds is far less risky than holding the bonds of a single foreign country. (This point is tempered by the fact that you are exposed to currency risk)
6. Diversification only works if done properly: Holding multiple bonds from ONE issuer does only a little to reduce risk. If the issuer defaults on one, they default on all. (e.g. ETF fund TIP - which holds all US IP bonds). There is a slight risk reduction by holding different maturities.

1. If you wanted to hold FOREIGN BONDS, then a diversified portfolio of Inflation-Protected Sovereign Foreign Bonds (like WIP) are the least risky investment. 2. These bonds, when added to a portfolio of your native currency, will add diversification and depending on the amount added, should, in theory, cause the portfolio to be less risky than a portfolio of 100% bonds in your native currency. The proper mix of foreign/local remains to be seen and depends on what your optimizer tells you.