Non-US Bonds

1
Non-US Bonds

• Chapter 9

2
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

3
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

4
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)

5
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)

6
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 issers
  credit rating

7
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 bonds YTM
• convert BEQ of US bond to annual-pay basis

8
Distribution of Government Securities

• 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

9
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

10
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

11
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

12
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
• CARCurrent account receipts, NFPEsNonfinancial
  public sector enterprises.

13
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
• public Pfandbriefe loans to public sector
  entities
• mortgage Pfandbriefe residential and commercial
  mortgages

14
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