A bond

A Comparative Analysis on Global Debt/Bond Market The debt

market (also Bond

market or credit

market)

is

a

financial

market where participants can issue new debt (Bond), known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on. So, for this report purpose we likely explain about global Bond Market. Bond Bond is a long-term debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer. International bonds The same as normal bonds. But the key concept is that international bonds are issued either in a currency other than that of the country in which they are issued or by an issuer that doesn’t reside in the country in which they are issued. International Bond Market: International Bond Market is very big and has an estimated size of more than 60 trillion dollars, and the size of the US bond market is the largest in the world. The US bond market's outstanding debt is more than $25 trillion. International bond markets are NOT unified into a single market (like stock exchange, foreign exchange and Eurocurrency market), they can be done Over the Counter basis.  Generally, every country has two bond markets: An Internal one and an External one.

 International bond markets are NOT unified into a single market (like stock exchange, foreign exchange and Eurocurrency market), they can be done Over the Counter basis.  It is a type of Fixed Income Investments  It can also called the global bond market, which allows investors to diversify their portfolio, preserve their wealth, and see attractive returns on their investment.  Bonds can range from extremely low risk to extremely high risk, with risks at all levels in between.

There are bonds from many developing countries that may offer excellent returns. This is because international bonds from developing nations may be somewhat riskier. The four major currencies used to denominate bonds are :    

Euro U.S. dollar British pound sterling Japanese yen.

This chart shows the number of deals and the volume in USD trillions outstanding in the international debt capital markets at end of Q4 2011 to end of Q4 2015.  

This chart shows the international debt capital markets volume by currency at end of 4th quarter 2015.

Bond Market Association The Bond Market Association was considered as the association for international trade and bond market industry. Its headquarters were situated in London, New York and in Washington. The Bond Market Association had worked like the global representative for those who issue bonds and trade with them. It played a big role in coordinating with governments, corporations and with the investors as well. It also had a code of conduct which the market participants had to follow very strictly. In the year 2006, the Bond Market Association was merged with Securities Industry Association which formed a new institution called the Securities Industry and Financial Markets Association.

Bond Market The Primary and the Secondary Market This market trades in a large number of bond types each day, and is separated into two distinct markets: Primary bond market (new issues):

Primary Bond Market is, where bonds are issued for the 1st time from an issuing entity and then sold to lenders Secondary bond market (used issues- resale) Secondary Bond Market is, where the investors who have bought bonds from the issuing entity go to sell these bonds, and where buyers looking for these bonds go. The stock market is small compared to the international bond market, even though the stock market is more well known to the public.

The Structure of International Bond Market The International Bond Market is an investment market just like the stock market, but there are some differences in the structure of these two markets.  The usual trading of bonds occurs on the over the counter market, and not on the exchanges like stocks are. The structure of the international bond market is all electronic.  There are a few corporate bonds which are the exception, because these may be traded on the exchanges.  Bonds are normally traded using networks, which are set up to utilize electronic trading.  Unlike the stock market, whose physical location is on Wall Street, there is no physical marketplace for the bond market. Instead, computers and telephones are used to buy, sell, and trade bonds.  The international bond market structure is continuously evolving and growing, and the number of bonds being traded is on the rise. This market is a good opportunity for investors to diversify their portfolio and invest in foreign markets at the same time.

Security Regulations That Ease Bond Issuance Shelf Registration (SEC Rule 415) - Allows the issuer to pre-register a securities issue, and then offer the securities when the financing is actually needed. SEC Rule 144A - Allows qualified institutional investors to trade private placements. - These issues do not have to meet the strict information disclosure requirements of publicly traded issues.

International Bond Market participants International Bond Market participants are either buyers (debt issuers) or sellers (institutions) of funds and often both of them. Participants include −  Institutional investors  Governments  Traders  Individuals

Since there is specificity (quality) of individual bond issues, and a condition of lack of liquidity in case of many smaller issues, a significantly larger chunk of outstanding bonds are often held by institutions, such as pension funds, banks, and mutual funds.

Segments of the International Bond Divided into four separate segments:    

Sovereign Bonds Foreign Bonds Global Bonds Eurobonds

1. Sovereign Bonds  Bonds issued by a country's central government.  Tend to be the largest sector of a bond market in any country.  They can be issued in their home country, the Eurobond market or the foreign sector of another country.  They are typically denominated in the home country's currency, however, but they are not required to be.  Ccounties with an unstable economy tend to denominate its bonds in the currency of a country with a stable economy. (Ex: Developing Countires having emerging markets such as those in Africa, Asia, Latin America, Middle East, Russia, and eastern/southern Europe ). 2. Foreign Bonds Type 1  Bonds Issued by foreign entity

 Outside the country where the entity resides  Denominated in the currency of the country where issued  Example: Toyota issues $ denominated bonds in USA. Type 2  Bonds Issued by foreign entity  Outside the country where the entity resides  Denominated in currency other than that of the country where issued  Example: Toyota issues Yen denominated bonds in USA

Some popular Foreign Bonds are given below: Can be issued in any currency and can have colorful nicknames such as:      

Yankee Bonds

:

Foreign Bonds sold in U.S. (Attract the max num of issuance) Samurai Bonds: Foreign Bonds sold in Japan. (Attract the max num of issuance). Bulldog Bonds: Foreign Bonds sold in U.K. Rembrandt Bonds: Foreign Bonds sold in Netherland. Matador Bonds: Foreign Bonds sold in Spain. Maple Bonds: Foreign Bonds sold in Canada

 

Kangaroo Bonds: Foreign Bonds sold in Australia. Supranational Bonds Issued when two or more central governments issue foreign bonds to promote economic development for the member countries. These include bonds issued by the International Bank for Reconstruction and Development,

or

World

Bank,

and

the

International

American

Development Bank. 3. Global Bonds  Similar to Foreign bonds market. But issued in many different countries and sold worldwide.  Denominated in 1 or many currencies and can be issued in the same currency as the country of issuance.  Registered in each market where issued.  Global bond issues were first offered in 1989.  Typically Iissued by international companies that possess high credit ratings.

Ex : Deutsche Telekom Global Bond which is the largest corporate global bond issue.Their multicurrency offering reached the $14.6 billion. The issue includes: 

Three U.S. dollar tranches with 5, 10, and 30 year maturities totaling

 

$9.5 billion, Two euro tranches with 5 and 10 year maturities totaling €3 billion, Two British pound sterling tranches with 5 and 30 year maturities



totaling £950 million, One 5 year Japanese yen tranche of ¥90 billion.

4. Eurobonds  Differ from the others in that; Bonds are not sold in any national bond market.  Issued by a group of multinational banks.  If a Eurobond is designated in any currency, it would be sold outside the country which uses that currency.  Ex: if a Eurobond is denominated in the US $ , it would not be sold in the US.  Very preferable because it has comparatively lower costs and lower regulations. Ex: Toyota issues Yen-denominated bonds in “offshore” market. (Foreign Banks or corporations located outside of one’s national boundaries) Named “EUROYEN Bond” And in another example, Swiss borrower issues $ denominated bonds to investors in UK, India, and Japan.

There is two types of Eurobond: 

Bearer Bonds Bonds with no registered owner. They offer anonymity but they also



offer the same risk of loss as currency. Registered Bonds: The owner’s name is registered with the issuer.

Eurobond Practices in the Primary Market  A borrower desiring to raise funds by issuing Eurobonds to the investing public, and 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.  The underwriting syndicate is a group of investment banks, merchant banks, and the merchant banking arms of commercial banks that specialize in some phase of a public issuance.  The lead manager will sometimes invite co-managers to form a managing group to help negotiate terms with the borrower, as certain market conditions, and manage the issuance.  The

managing

group,

along

with

other

banks,

will

serve

as

underwriters for the issue, that is, they will commit their own capital to buy the issue from the borrower at a discount from the issue price. 

The discount, or underwriting spread, is typically in the 2 to



2.5 percent range. Most of the underwriters, along with other banks, will be part of a selling group that sells the bonds to the investing public.

Eurobond Practices in the Secondary Market:  Eurobonds initially purchased in the primary market from a member of the selling group, and may be resold prior to their maturities to other investors in the secondary market.  The secondary market for Eurobonds is an OTC market with principal trading in London. However, important trading is also done in other major

European

money

Frankfurt, and Amsterdam.

centers,

such

as

Zurich,

Luxembourg,

 The

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 bid and ask prices.  Market makers trade directly with one another, through a broker, or with retail customers. 

The bid-ask spread represent market makers’ only profit; no other commission is charged

Eurobond Clearing Procedures  Eurobond transactions in the secondary market require a system for transferring ownership and payment from one party to another.  Two major clearing systems, Euro clear and Clear stream International, handle most Eurobond trades.  Euro clear is based in Brussels and is operated by Euro clear Bank.  Clear stream is located in Luxembourg.  Both clearing systems operate in a similar manner.  Each clearing system has a group of depository banks that physically store bond certificates.  Members of either system hold cash and bond accounts. When a transaction is conducted, electronic book entries are made that transfer book ownership of the bond certificates from the seller to the buyer and transfer funds from the purchaser’s cash account to the seller’s.

Other Functions of the Clearing System Euroclear and Clearstream perform other functions associated with the efficient operation of the Eurobond market.  The clearing systems will finance up to 90 percent of the inventory that a Eurobond market maker has deposited within the system.  The clearing systems will assist in the distribution of a new bond issue. The clearing systems 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.  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 amounts to the bond owners’ cash accounts.

International Bonds Market Instruments      

Straight Fixed Rate Debt Floating-Rate Notes Zero Coupon Bonds Equity-Related Bonds Dual-Currency Bonds Composite currency bonds

1/Straight Fixed Rate Debt

Also called “plain vanilla” bonds, come with a specified coupon rate and maturity, and no options attached.  Pays a regular fixed interest rate over a fixed period of time to maturity with the return of principal on the maturity date.  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 fixedrate issues.

2/Floating-Rate Notes  Just like an adjustable rate mortgage.  Interest rate is tied to a reference rate such as LIBOR or EURIBOR. Sometimes called Floating-rate notes, FRNs, or floaters.  Common reference rates are 3-month and 6-month 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”

3/Zero Coupon Bonds  Do not carry a coupon; the return on the bond comes from the fact that they are sold at a significant discount to the eventual redemption value.  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:

4/Equity-Related Bonds There are two types of Equity-Related Bonds: Convertible bonds and Bonds with Equity warrants: 

Convertible Bonds: A convertible bond issue allows the investor to exchange the bond for a predetermined number of equity shares of the issuer. 

The floor-value of a convertible bond is its straight fixed-rate bond value.



Convertibles usually sell at a premium above the larger of their straight debt value and their conversion value.

Investors are usually willing to accept a lower coupon rate of interest than the comparable straight fixed coupon bond rate because they find the conversion feature attractive.

 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.



They can be viewed as straight fixed-rate bonds with the addition of a call option (or warrant) feature.



The warrant entitles the bondholder to purchase a certain number of equity shares in the issuer at a prestated cash price over a predetermined period of time.



With a convertible bond, we surrender the bond to get the shares. But in Bonds with Equity Warrants we pay cash to get shares and keep the bond.

5/Dual-Currency Bonds:  Payments (Interest payments)are in another currency.  Japanese firms have been big issuers with coupons in yen and principal in dollars.  Good option for a Multinational Companies financing a foreign subsidiary.

6/ Composite currency bonds:  Portfolios of currencies: while some currencies are depreciating others may be appreciating, thus yielding lower variability overall.  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, Moody’s and Standard & Poor’s pprovide credit ratings on most international bond issues.  They focus on default risk, not exchange rate risk.  In

rating

sovereign

Bonds,

examination of: political

S&P’s

analysis

centers

around

an

risk, income and economic structure,

economic growth prospects, fiscal flexibility, general government debt burden,

offshore

and

contingent

liabilities,

monetary

flexibility,

external liquidity, public-sector external debt burden, and privatesector debt burden.  It has been noted that a disproportionate share of international bonds have high credit ratings.  The evidence suggests that a logical reason for this is that the Eurobond market is only accessible to firms that have good credit ratings to begin with.

International Bond Market Indices A bond index or bond market index is a method of measuring the value of a section of the bond market. It is computed from the prices of selected bonds (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.  International Bond Market Indices : 1. (Bank of America) Merrill Lynch Global Bond Index 2. Barclays Capital Aggregate Bond Index 3. Citi World Broad Investment-Grade Bond Index (World BIG)

 Government Bond Indices : 1. Barclays Inflation-Linked Euro Government Bond Index 2. Citi World Government Bond Index (WGBI) 3. FTSE UK Gilts Index Series 4. J.P. Morgan Government Bond Index