INTERNATIONAL BOND MARKET

International Bond Market

The world’s Bond Markets: A Statistical Perspective

More domestic bonds than international bonds are denominated in dollar and the yen while more international bonds than domestic bonds are denominated in the euro and the pound sterling

Foreign Bonds and Eurobonds

Foreign bonds-one offered by a freeing borrower to the investor in a national capital market and denominated in that nation’s currency.  Have colorful names that designate the country in which they are issued.

Yankee Bonds-dollar-denominated foreign bonds originally sold to U.S. investors, must be registered

Samurai Bonds-yen-denominated foreign bonds originally sold in Japan

Bulldogs-pound sterling-denominated foreign bonds sold in U.K.

Eurobond-one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. Known by the currency in which they are denominated

Bearer Bonds and Registered Bonds

Bearer Bond-possession is evidence of ownership.  Does not keep any records indicating who is the current owner of a bond. Desirable for investors desiring privacy and anonymity-tax evasion, investors usually accept lower yield

Registered Bonds-owner’s  name is on the bond and it is also recorded by the issuer, or else the owner’s name is assigned to a bond serial number recorded by the issuer

National Security Regulations

U.S. securities Act of 1933

Securities and Exchange and Commission

Global Bonds-a very large international bond offering by a single borrower that is simultaneously sold in North America, Europe, and Asia.  Enlarge the borrower’s opportunities for financing at reduced costs.  Largest corporate bond the Deutsche Telecom multi currency offering.

Types of Instruments

Straight Fixed-Rate issues-have a designated maturity date at which the principal of the bond issue is promised to be repaid.  During the life of the bond, fixed coupon payments, which are a % of the face value, are paid as interest to the bondholders.  Annual coupon redemption is more convenient for the bondholders and less costly for the bond issuer because the bond-holders are scattered geographically.  The Euro, U.s., British Pound , and Japanese yen most common

Euro-Medium-Term Notes

typically fixed-rate notes issued by a corporation with maturities ranging from less than a year to about 10 years. have a fixed maturity and pay coupon interest on period dates.  Partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis.  Damien Rice.  SOX-Sarbanes-Oxley Act is the U.s Law designed to eliminate corporate fraud

Floating-Rate Notes-

Medium-term bonds with coupon payments indexed to some reference rate.  LIBOR-interest rate index used by banks, similar to t-bill rate offered.  All bonds experience an inverse price change when the market rate of interest changes of interest changes.  Reset date-market price will gravitate back close to par value when the next period’s coupon payments are repriced to market expectations of future values of the reference rate, and subsequent coupon payments are repriced to market expectations of future values of the reference rate.

Equity-Related Bonds

  1. Convertible bond-allows the investor to exchange the bond for a predetermined number of equity shares of the issuer.  Floor-value-straight fixed-rate bond value.
  2. Bonds with equity warrants-straight fixed-rate bonds with the addition of a call option or warrant feature

Dual-Currency Bonds

Straight fixed-rate bond issued in one currency, that pays coupon interest in that same currency.  At maturity, the principal is repaid in another currency.  Coupon interest is frequently at a higher rate than comparable straight fixed-rate bonds.  The market value of a dual-currency bond in the in given country should equal the sum of the present value of the country currency stream discounted at the country market rate of interest plus the dollar principal repayment, converted to country currency as the expected future exchange rate, and discounted at the country market rate of interest.

Currency Distribution, Nationality, and Type of Issuer

Euro, U.S. dollar, British pound sterling, yen, Swiss Franc, and Canadian dollars have been the most frequently used currencies to denominate issues.  United States, Germany, the United Kingdom, France, and the Netherlands have been major issuers of international bonds during the past several years.  Financial institutions and governments have been the largest issuers of international bonds in recent years.

International Bond Market Credit Ratings

Fitch ratings, Moody’s Investors Service, and Standard and Poor’s have provided credit ratings on domestic and international bonds and their issuers.  Classify bond issues into categories based upon the creditworthiness of the borrower.  Based on analysis of current info regarding the likelihood of default and the specifies of th debt obligation.  Both reflect creditworthiness and exchange rate uncertainty.  Investment grade ratings-Aaa to Baa.  Disproportionate share of Euro-bonds have credit ratings in comparison to domestic and foreign bonds.  Issuers receiving low credit ratings invoke their publication rights and have had them withdrawn prior to dissemination.  Eurobond is accessible only to firms that have good credit ratings and name recognition to begin with, hence rate highly.

Tranches-?

Asymmetrical relationship-positive ratings events in one country have no impact on sovereign spreads in other countries, but negative ratings events are associated with a significant increase in spreads.  Attribute the spillover among countries to highly positively correlated capital and trade flows.

Eurobond Market Structure and Practices

Primary 

Market-borrower desiring to raise funds by issuing Eurobond to the investing public will contact an investment banker and ask it to serve as the lead manager of an underwriting syndicate that will bring the bonds to market

Underwriting syndicate-group of investment banks, merchant banks, and the merchant banking arms of commercial banks that specialize in some phase of a public issuance.

Lead manager will sometimes invite co-managers to form a managing group to help negotiate terms with the borrower, ascertain market conditions, and manage the issuance.  Rankings, are shown for the top overall underwriters (based on service clients, major currency sectors, and by-product) and by currency denomination of issues.

The managing group, along with other banks, will serve as underwriters for the issue, and will commit their own capital to by the issue from the borrower at a discount from the issue price.  The discount, or underwriting spread, is in the 2-2.5 % range.

Selling group-sells the bonds to the investing public.

Eurobonds initially purchased in the primary market from a member of the selling group may be resold prior to their maturities to other investors in the secondary markets.

Secondary market for Eurobonds-an over-the-counter market with

Secondary market comprises market makers and brokers connected by an array of telecommunications equipment.

Market makers-stand ready to buy or sell for their own account by quoting two-way bound ans ask prices.  Market makers trade directly with one another, through a broker, or with retail customers.  The bid-ask spread represents their only profit; no other commission is charged.

Brokers-accept buy or sell orders from market makers and then attempt to find a matching party for the other side of the trade; may also trade for their own account.

Clearing Procedures

Euroclear and Clearstream International, have been established to hand most Eurobound trades.  Clearing system has a group of depository banks that physically store bond certificates.  Members of either system hold cash and bond accounts.

  1. The clearing systems will finance up to 90 percent of the inventory that a Euro bond market maker has deposited within the system
  2. The clearing systems will assist in the distribution of a new bond issue.  Will take physical possession of the newly printed bond certificates in the depository, collect subscription payments from the purchasers, and record ownership of the bonds.
  3. The clearing systems will also distribute coupon payments.  The borrower pays to the clearing system the coupon interest due on the portion of the issue held in the depository, which in turn credits the appropriate amojnts tothe nond owner’s cash accounts.

International Bond Market Indexes

J.P. Morgan and Company Domestic Government Bond Index, J.P. Morgan publishes a government bond index for 29 countries and regions, broken down in up to 17 maturity bonds.  Global Government Bond Index is a value-weighted representation of the individual country government bond indexes.

Wall Street Journal publishes daily values of yields to maturity for U.S., Australia, Canadian, German, Japanese, Swedish, Swiss, and British Government of 2 year and 10 yr to maturity.  Allow for a comparison of the term structures of interest rates of these major industrial countries with one another.  Another source of international bond data is the coupon rates, prices, and yields to maturity found in the daily”Benchmark Government Bonds” table in Financial Times.

 

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