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Non-US Bonds. Chapter 9. Global Bond Markets. internal bond market (national bond market) domestic bond market – bonds from issuers domiciled in the country foreign bond market – bonds from issuers not domiciled in the country

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non us bonds

Non-US Bonds

Chapter 9

global bond markets
Global Bond Markets
  • internal bond market (national bond market)
    • domestic bond market – bonds from issuers domiciled in the country
    • foreign bond market – bonds from issuers not domiciled in the country
  • external bond market (international bond market – offshore bond market – Eurobond market)
    • underwritten by international syndicate
    • at issue, they are offered to investors in multiple countries
    • issued outside jurisdiction of any single country
    • unregistered form
  • global bond – one issued simultaneously in several bond markets throughout world
  • trading blocs
    • dollar bloc
    • European bloc
    • Japan
    • emerging markets
bond returns
Bond Returns
  • returns
    • local currency return
    • changes in foreign exchange rate (depreciated/appreciated)
  • reasons to allocate $$ to nondollar bonds
    • diversification
    • “increased opportunity to find value” in different markets
    • active currency bet if no hedge of foreign exchange
eurobond market
Eurobond Market
  • Eurodollar bonds – bonds denominated in US dollars
  • Euroyen bonds – bonds denominated in Japanese yen
  • often registered on national stock exchange but generally traded OTC market (some private placement also)
securities in eurobond market
Securities in Eurobond Market
  • Euro straights – annual coupons / “plain vanilla”
  • Floating Rate Notes – LIBOR
    • cap / floor / collared
    • stated maturity vs. perpetual
  • Dual Currency Bonds – coupon in one currency but principal in another
    • exchange rate set at issue is used to convert principal and coupons into specific currency
    • applicable exchange rate is rate at time CF is made
    • offers investor or issuer the choice of currency (option currency bonds)
securities in eurobond market1
Securities in Eurobond Market
  • Convertible Bonds
  • Bonds with Warrants – large part of market
    • warrants generally detachable
    • equity warrant
    • debt warrant
    • currency warrant
  • Coupon Step-Up Bonds
    • rate “steps-up” over time due to passage of time or change in reference rate
  • Coupon Step-Down Bonds
    • some coupons change based on changes in isser’s credit rating
yield comparisons
Yield Comparisons
  • bond-equivalent yield of Eurodollar bond

= 2[(1 + yield to maturity on Eurodollar bond )½ – 1]

  • suppose YTM on Eurodollar bond is 6%, then BEQ = 2[(1.06)½ – 1] = 0.0591 = 5.91%
    • BEQ always less than Eurodollar bond’s YTM
  • convert BEQ of US bond to annual-pay basis
distribution of government securities
Distribution of Government Securities
  • regular calendar auction / Dutch style auction
    • regular auction with winning bidders allocated securities at yield (price) they bid
  • regular calendar auction / minimum-price offering system
    • regular auction with winning bidders awarded securities at highest yield accepted by government (stop-out yield)
  • ad hoc auction
    • announce auctions when market conditions are favorable with amt and maturity of issue announced at offer
  • tap system
    • additional bonds of previously outstanding issue are auctioned
sovereign bond ratings
Sovereign Bond Ratings
  • ratings assigned:
    • local currency debt rating
    • foreign currency debt rating – traditionally, defaults greater on foreign currency-denominated debt
  • generally consider economic risk and political risk
sovereign ratings methodology
Sovereign Ratings Methodology
  • Political risk
    • Stability and legitimacy of political institutions
    • Popular participation in political processes
    • Orderliness of leadership succession
    • Transparency in economic policy decisions and objectives
    • Public security
    • Geopolitical risk
  • Income and economic structure
    • Prosperity, diversity, and degree to which economy is market oriented
    • Income disparities
    • Effectiveness of financial sector in intermediating funds; availability of credit
    • Competitiveness and profitability of nonfinancial private sector
    • Efficiency of public sector
    • Protectionism and other nonmarket influences
    • Labor flexibility
  • Economic growth prospects
    • Size and composition of savings and investment
    • Rate and pattern of economic growth
sovereign ratings methodology1
Sovereign Ratings Methodology
  • Fiscal flexibility
    • General government revenue, expenditure, and surplus/deficit trends
    • Revenue-raising flexibility and efficiency
    • Expenditure effectiveness and pressures
    • Timeliness, coverage, and transparency in reporting
    • Pension obligations
  • General government debt burden
    • General government gross and net (of assets) debt as a percent of GDP
    • Share of revenue devoted to interest
    • Currency composition and maturity profile
    • Depth and breadth of local capital markets
  • Off-budget and contingent liabilities
    • Size and health of NFPEs
    • Robustness of financial sector
  • Monetary flexibility
    • Price behavior in economic cycles
    • Money and credit expansion
    • Compatibility of exchange-rate regime and monetary goals
    • Institutional factors, such as central bank independence
    • Range and efficiency of monetary policy tools
sovereign ratings methodology2
Sovereign Ratings Methodology
  • External liquidity
    • Impact of fiscal and monetary policies on external accounts
    • Structure of the current account
    • Composition of capital flows
    • Reserve adequacy
  • Public sector external debt burden
    • Gross and net public sector debt, including structured debt, as a percent of CAR
    • Maturity profile, currency composition, and sensitivity to interest rate changes
    • Access to concessional funding
    • Debt service burden
  • Private sector external debt burden
    • Gross and net financial sector external debt, including deposits and structured debt, as a percent of CAR
    • Gross and net nonfinancial private sector external debt, including structured debt, as a percent of CAR
    • Maturity profile, currency composition, and sensitivity to interest rate changes
    • Access to concessional funding
    • Debt service burden
  • CAR—Current account receipts, NFPEs—Nonfinancial public sector enterprises.
pfandbriefe market
Pfandbriefe Market
  • German mortgage-bond market
    • largest asset in European bond market and 6th largest in world
    • bonds issued by mortgage banks in Germany
      • highly regulated
      • bonds backed by mortgage pools so covered – no single case of insolvency in this market
    • public Pfandbriefe – loans to public sector entities
    • mortgage Pfandbriefe – residential and commercial mortgages
emerging market bonds
Emerging Market Bonds
  • governments of emerging countries issue:
    • Brady bonds – bonds that represent a restructuring of nonperforming bank loans of governments into marketable securities
    • Eurobonds
    • Global bonds