Non-US Bonds
Chapter 9
Global Bond Markets
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internal bond market (national bond market)
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external bond market (international bond market – offshore bond
market – Eurobond market)
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domestic bond market – bonds from issuers domiciled in the country
foreign bond market – bonds from issuers not domiciled in the country
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
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dollar bloc
European bloc
Japan
emerging markets
Bond Returns
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returns
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local currency return
changes in foreign exchange rate
(depreciated/appreciated)
reasons to allocate $$ to nondollar bonds
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diversification
“increased opportunity to find value” in different
markets
active currency bet if no hedge of foreign
exchange
Eurobond Market
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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
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Euro straights – annual coupons / “plain vanilla”
Floating Rate Notes – LIBOR
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cap / floor / collared
stated maturity vs. perpetual
Dual Currency Bonds – coupon in one currency but
principal in another
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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 Market
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Convertible Bonds
Bonds with Warrants – large part of market
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Coupon Step-Up Bonds
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warrants generally detachable
equity warrant
debt warrant
currency warrant
rate “steps-up” over time due to passage of time or change
in reference rate
Coupon Step-Down Bonds
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some coupons change based on changes in isser’s credit
rating
Yield Comparisons
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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%
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BEQ always less than Eurodollar bond’s YTM
convert BEQ of US bond to annual-pay basis
Distribution of Government Securities –
nonUS Markets
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regular calendar auction / Dutch style auction
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regular calendar auction / minimum-price offering
system
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regular auction with winning bidders awarded securities at
highest yield accepted by government (stop-out yield)
ad hoc auction
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regular auction with winning bidders allocated securities at
yield (price) they bid
announce auctions when market conditions are favorable
with amt and maturity of issue announced at offer
tap system
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additional bonds of previously outstanding issue are
auctioned
Sovereign Bond Ratings
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ratings assigned:
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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
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Political risk
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Income and economic structure
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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
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
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Size and composition of savings and investment
Rate and pattern of economic growth
Sovereign Ratings Methodology
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Fiscal flexibility
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General government debt burden
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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
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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
Size and health of NFPEs
Robustness of financial sector
Monetary flexibility
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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 Methodology
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External liquidity
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Public sector external debt burden
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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
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Impact of fiscal and monetary policies on external accounts
Structure of the current account
Composition of capital flows
Reserve adequacy
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
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German mortgage-bond market
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largest asset in European bond market and 6th
largest in world
bonds issued by mortgage banks in Germany
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highly regulated
bonds backed by mortgage pools so covered – no single
case of insolvency in this market in over 100 years
public Pfandbriefe – loans to public sector entities
mortgage Pfandbriefe – residential and
commercial mortgages
Emerging Market Bonds
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governments of emerging countries issue:
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Brady bonds – bonds that represent a
restructuring of nonperforming bank loans of
governments into marketable securities
Eurobonds
Global bonds