How Scary Is the Bond Market?

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

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.

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.

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 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.

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.

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

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.

National Governments may also be able to enhance local authorities' direct access to capital markets, domestic and international, by granting authority to municipalities to issue infrastructure bonds.

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.

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

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.

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.

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.

For instance, even creditworthy municipal authorities could benefit from assistance in meeting the requirements of accessing 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.

Policies to support municipalities with a good financial standing and favourable credit rating that have tried to meet some of their investment needs by tapping local bond markets could yield good results.

Moreover, market volatility of portfolio investments was not a serious problem in Africa (especially in equity markets in Egypt and South Africa), particularly when compared to other markets.

Weak Labor, Strong Securities Markets

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

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

Governments and international financial institutions could consider providing bond guarantees to those municipalities.

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.

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.

But if they maintain large budget deficits and continue to monetize them, at some point after the current deflationary forces become more subdued bond markets will revolt. At this point, inflationary expectations will increase, long term government bond yields will rise, and the recovery will be crowded out.

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.

3 Trade securities or maneuver securities market with insider information

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.

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.

Both measures had an immediate and profound impact on financial markets. Seen from Wall Street, the euro was moving closer to becoming a normal currency.

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

Local bond markets provide alternative sources of financing for companies and Governments, which avoid exchange rate risks inherent to foreign financing.

It is a question that I am repeatedly asked at seminars and conferences. After all, participants in the housing and equity markets set prices with a view to prices in the bond market, so contagion from one long term market to another seems like a real possibility.

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.

These events have fueled fears that, even very deep and liquid markets such as US stocks and government bonds in the US and Germany may not be liquid enough. So what accounts for the combination of macro liquidity and market illiquidity?

This reaching for yield has driven up the prices of all long term bonds to unsustainable levels, narrowed credit spreads on corporate bonds and emerging market debt, raised the relative prices of commercial real estate, and pushed up the stock market s price earnings ratio to more than 25 higher than its historic average.

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

But it probably will have little to do with a bond market crash. That was the case with the biggest US stock market corrections of the last century (after 1907, 1929, 1973, 2000, and 2007) and the biggest US housing market corrections of all time (after 1979, 1989, and 2006).

A second cause lies in the fact that fixed income assets such as government, corporate, and emerging market bonds are not traded in more liquid exchanges, as stocks are. Instead, they are traded mostly over the counter in illiquid markets.

Reforming governance implies significant progress toward economic unification centralizing European debt through Eurobonds, mobilizing sufficient rescue funds, allowing the European Central Bank to intervene in the primary bond markets, and establishing both a fiscal and a banking union.

Beban Utang Tersembunyi pada Negara negara Emerging Market

Many countries therefore view the development of local currency bond markets to be an important policy priority that reduces vulnerability to external shocks.