Government Bonds In Domestic And Foreign Currency

The development of government bond markets and, in particular, their currency composition have recently received much interest, partly because of their relation with financial crises. The authors study the determinants of the size and currency composition of government bond markets for a panel of industrial and developing countries. They find that countries with larger economies, greater domestic investor bases, and more flexible exchange rate regimes have larger domestic currency bond markets, while smaller economies rely more on foreign currency bonds. Better institutional frameworks and macroeconomic fundamentals enhance both domestic currency bond markets and increase countries' ability to issue foreign currency bonds, while they raise the share of foreign exchange bonds.

The development of government bond markets and, in particular, their currency composition have recently received much interest, partly because of their relation with financial crises. The authors study the determinants of the size and currency composition of government bond markets for a panel of industrial and developing countries. They find that countries with larger economies, greater domestic investor bases, and more flexible exchange rate regimes have larger domestic currency bond markets, while smaller economies rely more on foreign currency bonds. Better institutional frameworks and macroeconomic fundamentals enhance both domestic currency bond markets and increase countries' ability to issue foreign currency bonds, while they raise the share of foreign exchange bonds.

This paper studies how institutional factors affect the size and currency composition of government bonds for a large sample of economies. Important for the debate on limiting financial crises, we find that less flexible exchange rate regimes are associated with larger foreign currency bond markets, suggesting countries either aim to signal their commitment to a fixed exchange rate regime or face moral hazard from international bailouts. We also find evidence that bigger economies with wider domestic investor bases have relatively larger domestic currency and smaller foreign currency bond markets. And foreign investor demand is mainly geared to foreign currency bonds.

This paper estimates the impact of foreign participation in determining long-term local currency government bond yields and volatility in a group of emerging markets from 2000-2009. The results of a panel data analysis of 10 emerging markets show that greater foreign participation in the domestic government bond market tends to significantly reduce long-term government yields. Moreover, greater foreign participation does not necessarily result in increased volatility in bond yields in emerging markets and, in fact, could even dampen volatility in some instances.

This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.

In recent years there has been an increased awareness of the international bond markets as potential sources of return enhancement and/or risk reduction. As a result, investors throughout the world have increasingly adopted a global approach and invested in bonds from several countries. Governments have encouraged this by liberalizing their bond markets, making them more liquid and more accessible to international investors. Futures and options markets have been developed on government bonds in several major countries, permitting more effective implementation of investment strategies. Many global investors restrict their participation in foreign bond markets to foreign government bonds because of their low credit risk and their liquidity. Because of their crucial role, The International Government Bond Markets by Frank J. Jones and Frank J. Fabozzi focuses on eight of the world's major government bond markets: the U.S., Japan, Germany, the U.K., France, the Netherlands, Canada and Australia. It is the first book that provides a single, unified, succinct source of information about these major government bond markets. The core information is supplemented by the treatment of several other topics of importance and interest to global bond investors. The book is divided into three sections: . Section I provides background information about price yield/conventions, accrued interest calculation, international clearing organizations and global custody. Section II describes the eight government bond markets in terms of: nature of the market (maturity, structure and types of issues); method of issuance (primary market); secondary market; price/yield conventions; settlement procedures; taxation; and futures and options markets. Section III discusses investment strategies, beginning with an overview of the foreign exchange market and instruments for controlling foreign exchange risk, and concluding with a general framework for designing an active global bond portfolio strategy.

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

The Asian Development Bank (ADB) is working closely with the Association of Southeast Asian Nations (ASEAN) and the People's Republic of China (PRC), Japan, and the Republic of Korea---collectively known as ASEAN+3---to develop local currency bond markets and facilitate regional bond market integration under the Asian Bond Markets Initiative (ABMI). ABMI was launched in 2002 to strengthen the resilience of the region's financial system by developing local currency bond markets as an alternative source to foreign currency-denominated, short-term bank loans for long-term investment financing. The need for infrastructure investment among ASEAN+3 members is well documented, with estimates for needed investment through 2020 reaching as high as $550 billion. Local currency financing of infrastructure projects has the important advantage of avoiding the currency risk that can arise when a project generating revenues in the domestic currency has foreign currency-denominated debt service requirements. This study was undertaken under ABMI and funded by the Government of the PRC. It addresses two key questions: (i) Why is local currency bond financing not more widely used for infrastructure projects in ASEAN+3? and (ii) What can be done to promote infrastructure bond financing?