Non-US Bonds

Chapter 9

Global Bond Markets

internal bond market (national bond market) domestic bond market – bonds from issuers domiciled in the country foreign bond market – bonds from issuers not domiciled in the country

external bond market (international bond market – offshore bond market – Eurobond market) 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 dollar bloc European bloc Japan emerging markets

Bond Returns

returns local currency return changes in foreign exchange rate

(depreciated/appreciated) reasons to allocate $$ to nondollar bonds

diversification “increased opportunity to find value” in different

markets active currency bet if no hedge of foreign

exchange

Eurobond Market

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 Euro straights – annual coupons / “plain vanilla” Floating Rate Notes – LIBOR

cap / floor / collared stated maturity vs. perpetual

Dual Currency Bonds – coupon in one currency but principal in another 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 Convertible Bonds Bonds with Warrants – large part of market

warrants generally detachable equity warrant debt warrant currency warrant

Coupon Step-Up Bonds rate “steps-up” over time due to passage of time or change

in reference rate Coupon Step-Down Bonds

some coupons change based on changes in isser’s credit rating

Yield Comparisons

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% BEQ always less than Eurodollar bond’s YTM

convert BEQ of US bond to annual-pay basis

Distribution of Government Securities – nonUS Markets regular calendar auction / Dutch style auction

regular auction with winning bidders allocated securities at yield (price) they bid

regular calendar auction / minimum-price offering system regular auction with winning bidders awarded securities at

highest yield accepted by government (stop-out yield) ad hoc auction

announce auctions when market conditions are favorable with amt and maturity of issue announced at offer

tap system additional bonds of previously outstanding issue are

auctioned

Sovereign Bond Ratings

ratings assigned: 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 Political risk

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

Income and economic structure 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 Size and composition of savings and investment Rate and pattern of economic growth

Sovereign Ratings Methodology Fiscal flexibility

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

General government debt burden 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 Size and health of NFPEs Robustness of financial sector

Monetary flexibility 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 External liquidity

Impact of fiscal and monetary policies on external accounts Structure of the current account Composition of capital flows Reserve adequacy

Public sector external debt burden 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 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

German mortgage-bond market largest asset in European bond market and 6th

largest in world bonds issued by mortgage banks in Germany

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

governments of emerging countries issue: Brady bonds – bonds that represent a

restructuring of nonperforming bank loans of governments into marketable securities

Eurobonds Global bonds