How Scary Is the Bond Market?

DUBLIN Bond markets are notoriously fickle, often driven by sentiment rather than rigorous macroeconomic analysis, and, as the 2008 global financial crisis demonstrated, they are far from infallible. They can also be particularly unreliable when assessing an economy s long term prospects.

South Africa was the only country in sub Saharan Africa to issue on international bond or equity markets in 1997.

Yes, financial markets in troubled countries for example, Russia s currency, equity, and bond markets have been negatively affected. But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.

Surprisingly, the bond market still seems almost oblivious to this risk. But holders of US debt worldwide have every reason to be concerned.

11 The Asian Bond Market Initiative was endorsed at the ASEAN 3 Deputies Meeting held in Chiang Mai in December 2002. Its objective is to develop efficient bond markets in Asia.

The US sovereign debt market shows no similar evidence of having reached a limit yet. But bond markets do not issue many early warning signals witness the sudden run up of yields in Italy and Spain a year ago.

Likewise, the development of bond markets has been gaining attention in a growing number of developing countries in all regions, though in many places bond markets are relatively new.

The Asian bond market and Asian bonds are thus mechanisms for financing for development that also promote greater regional economic stability.

The bonds carry market interest, but the State guarantee is equivalent to a subsidy.

Some might assume that bond markets are shielded from the effects of climate change, ecosystem degradation, and water scarcity. With more than 40 trillion of sovereign debt in global markets at any given time, that is a very high risk game.

Today's commercial markets worldwide, global commercial launch market?

On international financial markets, the war in Georgia has rendered Russian debt and bonds toxic. Interest rates on Russia s bonds have risen by 2 3 percentage points, and many Russian creditors no longer have access to international capital markets.

In the bond market, since June, due to the influence of multiple factors such as fundamentals and investor sentiment, the bond market has taken on a trend of improvement.

However, since the dynamics of domestic currency bond markets are linked to external bond markets, they are not immune to external volatility, and recent experience calls into question the effectiveness of local capital markets as a buffer against external volatility, particularly for a country considered as a high credit risk.

Market Manipulation Goes Global

For example, the Republic of Korea has undertaken measures to encourage the issuance of bonds by SMEs.10 One objective of the Asian bond market initiative11 is to increase bond financing options for smaller companies in Asia.

Global stock markets have, overall, reached new highs. And credit markets show low spreads, while long term bond yields have fallen in most advanced economies.

Moreover, a consortium might not have access to the financial market for the purpose of raising funds, where only corporations are authorized by the law to issue negotiable instruments and securities such as stocks, bonds and debentures.

Sovereign obligations, such as bonds, are commonplace in the capital markets, and demonstrate strong investor demand and confidence.

During the two year period, bond yields fell in most major markets and the Fund apos s total bond portfolio had a return of 3.6 per cent for the year ended 31 March 1997 and 7 per cent for the year ended 31 March 1998.

When the US housing market started to turn south, the biggest underwriters (such as Countrywide) did not go bankrupt right away, because they had sold the vast majority of their loans to the CDO market. Eventually, however, the uncertainty created by these CDOs nearly brought down the entire US banking system.

Global Markets u0027 Time Factor

European banks remain balkanized, with a patchwork of national regulators seeking to promote their own champions. European governments debt may all be denominated in euro, but German and Italian debt are hardly the same thing, so the government euro bond market lacks the depth and liquidity of the US Treasury Bill market.

But the creation of the euro caused a sharp fall in interest rates in the peripheral countries, leading to debt financed housing bubbles and encouraging their governments to borrow to finance increased government spending. Amazingly, global financial markets ignored the credit risks of this sovereign debt, requiring only very small differences between interest rates on German bonds and those of Greece and other peripheral countries.

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Local currency government debt markets have performed fairly well during the crisis, while local currency corporate debt markets have played a more modest role as a vehicle for longer term finance. This suggests that domestic reforms aimed at reducing issuance costs, improving disclosure requirements, enhancing creditors rights frameworks, and tackling other inhibiting factors could bring high returns.

The solution suggested by the Governor was to borrow about 400 million on the bond market to offset the deficit.

We see ever growing support for the proposal to develop an Asian bond market, which I put forth in 2001.

3. If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market this, too, will make holding debt more attractive.

If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market this, too, will make holding debt more attractive.

The globalization of power we talk about the globalization of markets, but actually it's the globalization of real power.

Debt markets would also benefit from such an initiative. Blurring the line between the private and the state owned sectors would, over time, reduce the latter s privileged access to and overuse of bank financing, leading to the expansion of corporate bond markets.

The Fund apos s bond portfolio was helped by its overweighting in United States and United Kingdom bonds and an underweight position in yen bonds.

38 For example, through strengthening institutions that provide long term finance, such as development banks and, where appropriate, bond markets.

The asset prices of emerging markets benefit from the loose expectation rally brought by the slow interest rate hikes of the Fed. It is better to actively grasp the investment opportunity of stock market and bond market under this environment.

Enhancing access to global markets

The shift favors hardline creditors in bond issuances governed by US law. With emerging market growth slowing, and external debt rising, new legal interpretations that make debt future write downs and reschedulings more difficult do not augur well for global financial stability.

In addition to providing more stability, bond markets are expected to stimulate domestic savings and investment.

The CDO market, however, was concentrated six or seven issuers controlled most of the market, and this market ended up representing 50 of the entire revenues to be gained through ratings. All of a sudden, issuers had much more influence on the rating agencies, which, like any good seller, were ready to bend a little not to alienate important customers.

In 1997, Argentina, Brazil, Ecuador, Panama and Venezuela retired 10.4 billion of collateralized Brady bonds through swaps against uncollateralized long term bonds, effected at a discount based on secondary market prices.

Of the roughly 200 trillion in global financial assets today, almost three quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities. The derivatives market certainly helps spread risk more widely than this superficial calculation implies, but the basic point stands.

3 Trade securities or maneuver securities market with insider information

The stock market s recent performance often is attributed to the unconventional monetary policies that many central banks have been pursuing. These policies, by design, lowered the return on sovereign bonds, forcing investors to seek yield in markets for higher risk assets like equities, lower rated bonds, and foreign securities.

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