How Scary Is the Bond Market?

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

Developing countries are increasingly financing their infrastructure through international capital markets, a trend reflected in the growth of their commercial bank borrowing and their increased use of bond and equity markets.

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.

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.

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.

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.

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.

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

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.

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.

(iv) The growth of domestic capital markets, particularly in developing countries, and its relationship with foreign portfolio investment.

The Bank of Japan already holds government securities worth 40 of GDP, and it is committed to annual purchases worth 16 of GDP within the framework of Prime Minister Shinzo Abe s economic revitalization agenda. The mammoth size of the BOJ program implies that it has taken full control of the market for government paper.

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.

Under the OMT program, the ECB can replace foreign outflows from sovereign bond markets through direct purchases, putting Spain on par with non eurozone countries like the United Kingdom. And, to the extent that there is even an informal price target associated with the ECB s commitment to purchase bonds, foreign outflows, at least from the sovereign bond market, are automatically replaced, in full, with ECB cash.

Moreover, including a smaller number of Member States in the set aside mechanism would facilitate consideration of any United Nations bond offering by market participants and would probably prove easier and less costly for the bond trustee to administer.

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.

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

The broader use of gross domestic product (GDP) and commodity price linked bonds in international markets would serve the same purpose.

In addition, the ECB could purchase EIB bonds on secondary markets, which would help to keep funding costs low or even reduce them. More important, purchases of EIB bonds would enable the ECB to undertake quantitative easing without triggering the degree of controversy implied by intervening in 18 separate sovereign bond markets, where concerns that ECB purchases would affect the relative pricing of sovereigns are very real.

Meanwhile, the main transmission channels of monetary stimulus to the real economy the bond, credit, currency, and stock markets remain weak, if not broken. Indeed, the bond market channel is unlikely to boost growth.

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

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.

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.

In 2003, Mexico successfully issued new bonds which included CACs without incurring an increase in spreads, thus paving the way for a more frequent inclusion of CACs in emerging market bond issues.

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.

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.

Weak Labor, Strong Securities Markets