International bond market

Introduction
despite considerable growth, domestic debt markets in the emerging economies remain small compared to industrial countries. The main forces underlying the growth of emerging debt markets have been public sector deficits associated with fiscal adjustment and related banking and corporate sector reforms. There has been much less success in developing corporate bond markets. While banks on average hold the largest proportion of bonds in domestic markets. institutional investors have become key holders of domestic debt securities in both Latin America and central Europe.

Size and growth of emerging debt markets

At the end of 2000, the emerging economies covered in this note had a total of $1.9 trillion in domestic and international bonds outstanding, double the amount in 1994. Domestic bonds on average accounted for 79% and public sector bonds for 64% of bonds outstanding at the end of 2000. one third of GDP for the emerging economies in the sample are the domestic bond markets. Malaysia and Korea are the only countries with domestic bond markets comparable in size to those in Germany and the United Kingdom.
Composition of bonds outstanding in 1994 and 2000
Asia Latin America Emerging Europe All 45 66 55 50 42 34 26 10 3 4 Int 5 pri 13 5 pub Dom 28 40 30 20 10 3 0 10 4 Int pri pub Dom 20 11 11 12 7 11 12 5 10 0 28 37 26 40 30 20 70 60 50 48 60 56 52 70 60 50

International and domestic bonds outstanding

Total International public sector bonds 1994 12 1 11 1 17 3 40 1 2000 30 1 131 7 34 5 195 4 International private sector bonds 1994 53 3 43 3 3 0 99 2 2000 117 4 80 5 8 1 205 4 Domestic public sector 2 bonds 1994 223 12 176 12 127 19 526 13 2000 533 20 366 21 124 17 1,024 20 Domestic private sector 2 bonds 1994 206 11 86 6 11 2 303 7 2000 377 14 81 5 12 2 470 9

1994 Asia Percentage of GDP Latin America Percentage of GDP 3 Other Percentage of GDP Total Percentage of GDP 494 26 316 22 158 24 968 24

2000 1,058 39 657 37 179 24 1,894 36

Structure of bonds outstanding, 1994 and 2000

(as a percentage of total) International bonds 1994 Asia Latin America Central Europe and other Total
2

Domestic 1 bonds 1994 87 83 87 86 2000 86 68 76 79

Public sector bonds 1994 48 59 91 59 2000 53 76 89 64

Private sector bonds 1994 52 41 9 42 2000 47 24 12 36

2000 14 32 24 21

13 17 13 14

Bond issuance
Over 19942000, emerging market debt issuance amounted to $2.2 trillion, on average $300 billion a year. Latin America accounted for one half of total issuance, and Asia for the bulk of private sector issuance. Central Europe and South Africa lagged considerably behind Latin America and Asia, in particular in terms of private sector issuance.

International and domestic bonds issued, 1994 1 2000

Total issued Public sector Asia Percentage of total Latin America Percentage of total Other
2

Total issued

International bonds Private sector 223 24 172 16 11 6 407

18

Domestic bonds Public sector 352 38 561 51 134 71 1,046

47

Private InterPublic Domestic sector national sector 533 58 359 33 19 10 910

41

Private sector 309 34 186 17 7 4 503

23

Total issued 19942000

389 42 734 67 171 90 1,293

59

260 28 345 32 48 26 654

30

661 72 747 68 141 74 1,549

70

37 4 173 16 37 20 247
11

922

1,092

Percentage of total Total

Percentage of total

189

2,203

Macroeconomic aspects of debt market development

domestic and external financial liberalization and deregulation have intensified competition among issuers. the need to finance large public sector budget deficits and the avoidance of monetary financing have generally been viewed as key macroeconomic forces underlying the development of debt markets. countries with larger fiscal deficits have issued more public sector bonds in domestic and international markets. Low inflation has been identified in the literature as an essential precondition for the development of debt markets. lower inflation is associated with longer maturities.

FOREIGN BONDS AND EURO BONDS

Bearer bond and registered bond. National security registration Withholding taxes. Global bonds.

BEARER BONDS AND REGISTERED BONDS

Bearer bonds are bonds with no registered owners.as such they offer anonymity but they also offer the same risk of loss of currency. Registered bonds: the owners name is registered with the issuer.

National security registration

Yankee bond must meet the requirements of the SEC, just like U.S domestic market. Many borrowers find this level of regulation burdensome and prefer to raise U.S dollars in the euromarket. Eurobond sold in the primary market in the united states may no t be sold to the U.S citizen. A U.S citizen could buy a eurobond on the secondry market.

Withholding Taxes
Prior to 1984, the United States required a 30 percent withholding tax on interest paid to nonresidents who held U.S. government or U.S. corporate bonds. The repeal of this tax led to a substantial shift in the relative yields on U.S. government and Eurodollar bonds. This lends credence to the notion that market participants react to tax code changes.

Global bonds
A global bond is a very large international bond offering by a single borrower that is simultaneously sold in North America, Europe and Asia. Global bonds denominated in U.S. dollars and issued by U.S. corporations trade as Eurobonds overseas and domestic bonds in the U.S.

Types of Instruments
Straight Fixed Rate Debt Floating-Rate Notes Equity-Related Bonds Zero Coupon Bonds Dual-Currency Bonds Composite Currency Bonds

Straight Fixed Rate Debt

These are plain vanilla bonds with a specified coupon rate and maturity and no options attached. Since most Eurobonds are bearer bonds, coupon dates tend to be annual rather than semi-annual. The vast majority of new international bond offerings are straight fixed-rate issues.

Floating-Rate Notes
Just like an adjustable rate mortgage. l Common reference rates are 3-month and 6month U.S. dollar LIBOR Since FRN reset every 6 or 12 months, the premium or discount is usually quite small as long as there is no change in the default risk.

Equity-Related Bonds
Convertibles
Convertible bonds allow the holder to surrender his bond in exchange for a specified number of shares in the firm of the issuer.

Bonds with equity warrants

These bonds allow the holder to keep his bond but still buy a specified number of shares in the firm of the issuer at a specified price.

Zero Coupon Bonds

Zeros are sold at a large discount from face value because there is no cash flow until maturity. In the U.S., investors in zeros owe taxes on the imputed income represented by the increase in present value each year, while in Japan, the gain is a tax-free capital gain. Pricing is very straightforward: PV =PAR/(1 + r)T

Dual-Currency Bonds
A straight fixed-rate bond, with interest paid in one currency, and principal in another currency. Japanese firms have been big issuers with coupons in yen and principal in dollars. Good option for a MNC financing a foreign subsidiary.

Composite Currency Bonds

Denominated in a currency basket, like the SDRs or ECUs instead of a single currency. Often called currency cocktail bonds. Typically straight fixed rate debt.

International Bond Market Credit Ratings

Fitch IBCA, Moodys and Standard & Poors sell credit rating analysis. Focus on default risk, not exchange rate risk. Assessing sovereign debt focuses on political risk and economic risk.

Eurobond Market Structure

Eurobond Market Structure
Very similar to U.S. underwriting.

Secondary Market
OTC market centered in London.
Comprised of market makers as well as brokers. Market makers and brokers are members of the International Securities Market Association (ISMA).

Clearing Procedures
Euroclear and Cedel handle most Eurobond trades.

International Bond Market Indices

There are several international bond market indices. J.P. Morgan and Company
Domestic Bond Indices International Government bond index for 18 countries. Widely referenced and often used as a benchmark. Appears daily in The Wall Street Journal