This paper examines the nature of sovereign credit risk using a comprehensive sample of sovereign credit default swap (CDS) spreads for 26 developed and emerging-market countries. The authors find that sovereign credit spreads are highly correlated, with just three principal components accounting for more than 50% of their variation. These correlations are driven by global factors such as U.S. stock and high-yield bond markets, global risk premia, and capital flows, rather than country-specific economic measures. The excess returns from investing in sovereign credit are largely compensation for bearing global risk, with little evidence of a unique country-specific credit risk premium. A significant portion of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia. The findings suggest that sovereign credit risk is more systematic and driven by external factors, which has implications for portfolio diversification and the risk premium in sovereign credit markets.This paper examines the nature of sovereign credit risk using a comprehensive sample of sovereign credit default swap (CDS) spreads for 26 developed and emerging-market countries. The authors find that sovereign credit spreads are highly correlated, with just three principal components accounting for more than 50% of their variation. These correlations are driven by global factors such as U.S. stock and high-yield bond markets, global risk premia, and capital flows, rather than country-specific economic measures. The excess returns from investing in sovereign credit are largely compensation for bearing global risk, with little evidence of a unique country-specific credit risk premium. A significant portion of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia. The findings suggest that sovereign credit risk is more systematic and driven by external factors, which has implications for portfolio diversification and the risk premium in sovereign credit markets.