1. International Bond Markets
CHAPTER 29
International Bond Markets
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Learning Objectives
The classification of global financial markets
What the foreign bond market is
What a global bond is
What a Eurobond is and the different types of Eurobond structures
The classification of the global bond market in terms of trading blocs
The euro government bond market
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3. Learning Objectives (continued)
The methods of distribution of new government bonds
The issuance of linkers by sovereign issuers
Factors considered in the rating of sovereign bonds
How to compare yields on U.S. bonds and Eurobonds
The European covered bonds market
Emerging market bonds
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4. CLASSIFICATION OF BOND MARKETS
There is no uniform system for classifying the sectors of the global bond market
Within the domestic financial market, there is the domestic bond market
This market is where issuers domiciled within the country issue bonds and where those bonds are traded
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5. CLASSIFICATION OF BOND MARKETS (CONTINUED)
In comparison, there is also the foreign bond market
This is the market where bonds of issuers not domiciled in the country are issued and traded
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6. CLASSIFICATION OF BOND MARKETS (continued)
The external bond market, also called the international bond market, is that part of a country’s external financial markets that includes bonds with the following features
Underwritten by international syndicate
Issue offered simultaneously to investors in a number of countries
Issued outside the jurisdiction of any single country
Issued in unregistered form
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7. CLASSIFICATION OF BOND MARKETS (continued)
The external market is often called the offshore bond market, or Eurobond market
A global bond is one that is issued simultaneously in several bond markets throughout the world
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8. CLASSIFICATION OF BOND MARKETS (continued)
Classification by Trading Blocs
Another way to classify the global bond market is in terms of trading blocs
Dollar bloc (US, Canada, Australia, and New Zealand)
European bloc, which is divided into euro zone market bloc (countries with the euro as currency)
Non-euro zone market bloc
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EUROBOND MARKET
The Eurobond market is classified by the currency denomination of the issue
For example, there is the Eurodollar bond and the Euroyen bond
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10. EUROBOND MARKET (continued)
Securities Issued in the Eurobond Market
Fixed coupon bonds are Euro straights
There are floating-rate notes, whose coupon rate is stated as a margin over LIBOR
Dual-currency issues pay coupon in one currency but pay the principal in a different currency
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11. EUROBOND MARKET (continued)
Securities Issued in the Eurobond Market
An investor’s choice of currency is found in option currency bonds. Lastly, the bonds can be convertible or have warrants attached to them
An equity warrant permits the warrant holder to buy the common stock of the issuer at a specified price
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12. EUROBOND MARKET (continued)
Securities Issued in the Eurobond Market
A debt warrant entitles the warrant holder to buy additional bonds from the issuer at the same price and yields
A currency warrant permits the warrant holder to exchange one currency for another at a set price
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13. EUROBOND MARKET (continued)
Comparing Yields on U.S. Bonds
Eurobonds pay annual coupon whereas US bonds pay semiannual coupon
To convert, we use the following formula:
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14. GOVERNMENT BOND MARKETS
Methods of Distribution of New Government Securities
There are four methods to distribute new securities of central governments
Regular calendar auction/Dutch-style system
Regular calendar auction/minimum-price offering
Ad hoc auction system
Tap system
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15. GOVERNMENT BOND MARKETS (continued)
Inflation-Indexed Bonds
Some Treasury securities, Treasury Inflation Protection Securities, are inflation protected, where coupons are linked to an inflation index
Outside the US, bond coupon rates are linked to the rate of inflation and are called linkers
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16. GOVERNMENT BOND MARKETS (continued)
Sovereign Bond Ratings
There are two sovereign debt ratings assigned by rating agencies: a local currency debt rating and a foreign currency debt rating
The reason for distinguishing between the two is that historically the default frequency has been higher on foreign currency denominated debt
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EMERGING MARKET BONDS
The financial markets of Latin America, Asia (except Japan), and eastern Europe are viewed as emerging markets
Governments of emerging market countries issue Brady bonds, Eurobonds, and global bonds
Brady bonds are basically bonds that represent a restructuring of nonperforming bank loans into marketable securities
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18. THE EUROPEAN COVERED BONDS MARKET
One of the largest sectors of the European market is the covered bonds market
Covered bonds are issued by banks, and are collateralized by residential or commercial mortgage loans, or public sector loans
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19. THE EUROPEAN COVERED BONDS MARKET (CONTINUED)
The German mortgage-bond market, called the Pfandbriefe market, is the largest covered bonds market
The sector of the Pfandbriefe market that has received the greatest interest from global institutional bond investors is the Jumbo Pfandbriefe sector, which has a minimum size requirement of 500 million Euros
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Summary
The global bond market can be classified into two markets: the internal or national bond market, which consists of a domestic bond market and a foreign bond market, and the external or international bond market (or Eurobond market)
Sovereign debt is the obligation of a country’s central government
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Summary (CONTINUED)
Investors in the debt of governments of emerging countries are exposed to credit risk
Governments of emerging market countries issue Brady bonds, Eurobonds, or global bonds
At one time Brady bonds were a major part of the emerging bond market, but they are less important today
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Summary (CONTINUED)
Covered bonds are issued primarily in Europe by banks using predominately residential and mortgage loans as collateral
This sector has become a major sector in the global bond market
Although covered bonds are often compared to mortgage and asset-backed securities, there are differences in their credit protection and structure
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