Reading 51: Fixed-Income Markets for Government Issuers

Book 3: Fixed Income

What do sovereign entities spend debt funds on?

public g/s and public infrastructure

Who are the largest debt issuers in domestic markets?

sovereign issuers

What do sovereign entities spend debt funds on?

public g/s and public infrastructure

Who are the largest debt issuers in domestic markets?

sovereign issuers

How are private sector issuances different from public sector issuances?

accounting standards are more cash based rather than accrual based

Reserve Currency

the currency used to conduct international trade

What is the difference between Developed Market Issuers and EM Issuers in terms of the currency used?

developed ==> domestic currency

EM ==> home currency or foreign currency

Domestic Debt

issued in the nation’s home currency and held by domestic traders

External Debt

owed to foreign creditors and may be denominated in home currency or foreign reserve currency

Debt Management Policy

sets the amount and type of security the government intends to use

How does Ricardian Equivalence play a role in this reading?

governments should be indifferent from issuing short- or long-term maturities, but they cannot because investors are not rational and do not save when expected tax increases happen,

therefore governments must manage the short- and long-term issuances they administer

Do market participant's prefer short- or long-term issues?

short

Nonsovereign Government Bonds

issued by states, provinces, and entities created to fund and provide services

Agency Bonds/Quasi-Government Bonds

issued by entities that national governments creates for specific purposes

General Obligation Bonds (GO Bonds)

local or regional government bonds that raise for general public spending and is backed by taxpayers

Revenue Bonds

local or regional government bonds issued for a specific project and backed by the project’s revenue

Supranational Bonds

issued by international institutions to promote economic cooperation

Ginnie Mae

securitizes and guarantees mortgage loans

What kind of bonds does Ginne Mae issue?

Agency Bonds

What kind of bonds does IMF and World Bank issue?

supranational bonds

How do sovereign issuers sell their bonds?

public auctions

Competitive Bids

used to set the price of the debt issue

Noncompetitive Bids

guaranteed to have their allocation met at the price determined by the competitive bids

Cut-Off Yield

the yield of the successful competitive bid with the lowest price

Single-Price Auction

all investors pay the same price of the cut-off yield

Multiple Price Auction

successful competitive bidders pay the actual price they bid at

Primary Dealers

required to make competitive bids in auctions and acts as a counterparty to central bank in carrying out monetary policy

have to buy and sell securities

On-The-Run Bonds

the most active, most price-informative, and most recently issued securities that are traded frequently

What kind of bonds are used to benchmark the yield curve?

On-The-Run Bonds