FNCE 4070
Financial
Markets and
Institutions
Lecture10
The Global Bond
Markets
Changing Nature of the Global
Bond Market
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Historically, the U.S. bond market dominated the global
bond market, with the U.S. market representing a key
source of financing for U.S. and foreign corporations.
However, since the expansion of the European Union and
the advent of the Euro-Zone, Europe’s importance in the
global bond market as grown.
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In 2001, the U.S represented 44% of the world’s bond market; the
European Union represented 28% (the Euro-zone countries: 23%).
By 2009, the U.S. share of the global bond market had fallen to
34% and the European Union’s share had grown to 36% (the
Euro-zone countries: 30%).
While today the U.S. market is dominated by U.S. firms,
an increasing of U.S. company bond financing is taking
place in the European bond markets.
Trends in Debt Markets
Institutional Arrangements in
Corporate Funding
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The historical institutional patterns of corporate
borrowing in various countries have influenced
the development the a country’s bond markets
and equity markets.
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In Japan and Germany, companies have relied less on
equity markets for funds than their counterparts in the
U.S. In both of these counties, banking has been a
relatively more important source of funds.
In Europe, the close ties between banks and their
corporate clients hindered the development of a
European corporate bond market.
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That changed, however, with the launch of the euro in 1999,
which promoted the development of Europe’s bond market.
Importance of Banking Markets for
the U.S., Japan and Germany
Importance of Banking Markets for
the U.S. and Europe
Growing Importance of Bond
Markets in Europe
Bond Market Growth in Europe:
Pre and Post the Euro
Bond Market Growth in Europe
Since the Introduction of the Euro
Impact of Larger European Bond
Market on Bond Spreads
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High Yield Spread
equals the difference
between the Merrill
Lynch European High
Yield Corporate Bond
Issuers and the 10
year German
Government
benchmark bond
yield.
The Rise of the Foreign Bond Market
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In contrast to the IPO equity financing, where the majority
of U.S. firms exhibit a strong home bias, in bond financing a
growing number of U.S. issuers are relying more on foreign
bond markets for funding.
For example: The percent of all U.S. firms issuing bond’s
domestically fell from 92% in 1995 to 82% in 2006.
Additionally, the share of non-financial U.S. firms issuing
bonds domestically declined from 95% to 83% over the
same period.
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Thus, U.S. corporates are increasing their funding presence in
the foreign bond markets.
At the same time, the share of European issuers borrowing
in the U.S. bond market dropped from more than 20% in
2000 to approximately 9% in 2006.
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Thus, European firms are increasing turning to their own markets
In addition to issuing more equity in their home markets for debt
financing
U.S. Stock Exchanges Share of IPO
Offerings
New Listings on Large Stock Exchanges
(% of Total Global Listings)
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Note: AIM is the Alternative Investment Market segment of the London Stock Exchange; it was
launched in 1995 as a market mainly for smaller companies backed by venture capital.
U.S. Bond Markets Share of Bond
Offerings
Classifying the World’s Bond Markets
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The world’s bond market can be divided into two
broad groups:
(1) the domestic bond market and
(2) the international bond market.
(1) The domestic bond market is comprised of all
securities issued in each country by “domestic”
government entities and corporates.
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In this case, issuers are domiciled (i.e., headquartered) in
the country where those bonds are traded.
(2) The international bond market is comprised of
non-residents borrowing in another country’s bond
markets
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The international bond market consists of two groups:
(1) Foreign Bonds and
(2) Eurobonds.
Foreign Bonds: Characteristics
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Foreign Bonds are bonds issued by a non-resident
and denominated in the currency of the country in
which it is being placed (i.e., issued).
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Foreign bonds are subject to the regulations of the
country in which the bond is being offered.
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The SEC regulates foreign bond offerings in the U.S.
Historically, the most important foreign bond markets
have been in Zurich, New York, and Tokyo.
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Example: Ford Motor Corporation issuing a yen denominated
bond in Japan
Zurich and Tokyo because of low market interest rates; the
U.S. because of its large market.
Foreign bonds are often swapped out for another
currency.
History of the Foreign Bond
Market
100 years ago, the international bond markets consisted solely
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of foreign bonds, that is, bonds issued, placed, and traded in a
bond market which was foreign to the issuer's country of
incorporation.
Issuers were typically foreign governments or private sector
utilities such as railway companies.
After WW I, the world saw a strong U.S. economy and a strong
U.S. dollar. During this period, world capital markets served
primarily to channel European savings into the U.S. economy.
Issuance activity elsewhere in the international markets remained
small.
This dominance of the U.S. foreign bond market became even
stronger after WW II. For years the U.S. foreign bond market was
the largest and most important foreign bond market.
In recent years, however, it has been surpassed by the Swiss
franc (CHF) foreign bond market.
Unique Names for Foreign Bonds
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The financial markets
have come up with
unusual nicknames for
foreign bonds. These
include:
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Yankee bonds
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Issued in Japan.
Issued in Canada.
Panda bonds
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Issued in Australia.
Maple bonds
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Issued in New Zealand.
Kangaroo bonds
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Issued in the United
Kingdom.
Kiwi bonds
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Issued in the Netherlands.
Samurai bonds
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Issued in Spain.
Rembrandt bonds
Bulldog bonds
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Issued in the United States.
Matador bonds
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Issued in China.
Kangaroo or Matilda
bonds
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Issued in Australia.
Impact of Exchange Rate Changes on
Foreign Bond Returns (For U.S. Investors)
Eurobonds
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Eurobonds are bonds issued by a non-resident
and denominated in other than the currency of
the country in which it is being placed.
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The bond’s currency of denomination is referred to as an
offshore currency.
Example: Coca Cola issuing a U.S. dollar denominated
bond in Europe.
They are generally issued and sold simultaneously
in more than one market and thus the advantage of
the Eurobond market is that issuers can raise large
sums of capital from investors all around the world.
Issuers include national governments,
supranational organizations (such as the World
Bank),“AAA” corporations and global banks.
The U.S. dollar is the dominant currency of
denomination for Eurobonds.
History of the EuroBond Market
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The first Eurobond (which was also a U.S. dollar
denominated bond) was the July 1963 issue by the Italian
Autostrade (Italian National Highway Authority), led by SG
Warburg & Co and issued in London.
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$15 million; 5.5% coupon; 15 year bonds; listed on the London
and Luxembourg stock exchanges.
By 1972, the market had grown to $5 billion; $42 billion by
1982 and $371 billion by 1995.
In the early 1960s, the Eurobond market was mainly a
Eurodollar bond market.
Today, the Eurobond market comprises bonds
denominated in all the major currencies and several minor
currencies.
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For example, in 1996, the Eurobond market included issues
denominated in the Egyptian pound, Polish zloty and Croatian
kuna.
EuroBond Market by Currency,
Early Years (% of Total Volume)
The Main Features of a Eurobond
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Eurobonds are not regulated by the country of the currency in
which they are denominated.
Eurobonds are “bearer bonds”, i.e., they are not registered
anywhere centrally, so whomever holds (or bears) the bond is
considered the owner. Bearer status also enables Eurobonds
to be held anonymously.
The Eurobond market is largely a wholesale (i.e., institutional
market) with bonds held by large institutions.
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Pension funds, insurance companies, mutual funds
Since they are denominated in an offshore currency, investors
in euro-bonds assume both credit and foreign exchange risks
(if the currency if denomination is other than their home
currency).
Some publically offered eurobonds trade on stock exchanges,
normally in London or Luxembourg. Others are placed
directly with institutional investors without a listing (private
placement).
Types of Eurobonds
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Conventional or Straight Eurobonds have a fixed coupon (usually paid on an annual
basis) and maturity date when all the principal is repaid.
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Floating rate bond notes (FRN) are usually short to medium term bond issues, with a
coupon interest rate that “floats,” i.e. goes up or down in relation to a benchmark rate plus
some additional “spread” of basis points (each basis point being one hundredth of one
percent). The reference benchmark rate is usually LIBOR (London interbank offered rate)
or EURIBOR (Euro interbank offered rate). The “spread” added to that reference rate is a
function of the credit quality of the issuer.
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Zero-coupon bonds do not have interest payments.
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Convertible bonds can be exchanged for another instrument, usually an ordinary share or
shares (fixed ahead of time with a predetermined price) of the issuing organization. The
coupon payable is usually lower than it otherwise would be. Because convertible bonds
can be viewed more as equity shares than bonds, the credit and interest rate risks for
investors are higher than with conventional bonds.
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High-yield bonds are also part of the Eurobond markets, a class of bonds (rather than a
type of bond) which individual investors may encounter. High-yield bonds are those that
are rated to be “below investment grade” by credit rating agencies (i.e. issuer has a credit
rating below BBB).
Rise of the Euro-Bond Market
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The Eurobond market offers several advantages
for borrowers that may account for its rising
popularity.
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(1) It gives U.S. borrowers access to a wider range of
lenders and debt instruments, enabling them to
diversify their sources of long-term funding.
(2) In addition, the market provides a good
environment for internationally active companies to
hedge foreign currency exposures (through offsetting
liabilities)
(3) finally, through this market companies can
enhance their global profile.
Euro-Dollar Bond Offering
Announcement
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Development Bank of Japan Inc. (DBJ; President and Chief
Executive Officer: Minoru Murofushi) launched its EuroDollar bond, guaranteed by the government of Japan, on
March 8 2011.
Details are as follows:
Issue amount : U.S.$ 500 million
Maturity : March 15 2016
Coupon : 2.750%
Issue price : 99.486%
Guarantor : Japan
Listing : London Stock Exchange
Lead Manager : Barclays Bank PLC, Merrill Lynch
International
Nicknames for Eurobonds
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Dragons: U.S. dollar denominated bonds
issued in Asia.
Shogun: Foreign currency bonds (including
U.S. dollar bonds) issued in Japan
Dim-Sum: Chinese yuan denominated bond
issued in Hong Kong.
Domestic Versus International Bond
Market by Country; % of GDP, 2009
Relative Growth of Foreign Bonds
and Euro Bonds, Early Years
Relative Growth of Foreign Bonds
and Euro Bonds, Later Years
Euro-Bond Market Versus U.S.
Bond Markets
Eurobonds: 1964 - 1969
Eurobonds; 1995 - 2006
Emerging Market Bond Trends
Improving Credit Quality
Spreads over U.S. AA
Corporates
Foreign Ownership of U.S. Corporate
Equities and U.S. Corporate Bonds
Estimated Ownership of U.S.
Treasury Securities, June 2008
Estimated Ownership of U.S.
Treasury Securities, 1997 - 2008
Foreign Ownership of U.S. Treasuries,
December 2008 (Billions of $)
Volatility in the Bond Markets