fixed income 3: Fixed-Income Issuance and Trading

What are the three primary dimensions for categorizing fixed-income instruments?

• Issuer type (sector) – corporate, sovereign, supranational, or quasi-government.

• Credit quality – from default-risk-free to investment grade to high yield.

• Time to maturity -

  • short (≤1 year)

  • intermediate (1–10 years)

  • long(>10 years).

How does the number of fixed-income instruments issued by a company typically compare to equity instruments?

• Issuers often have many fixed-income instruments outstanding

• equities are usually limited to one or two instruments.

what are the three types of debt instruments

1. Commercial paper – short-term unsecured, used to finance working capital, may be collateralised by assets

2. Bank loans – revolving credit facilities or term loans.

3. Bonds – intermediate to long-term debt.

What is a credit rating?

• A qualitative, letter-grade (AAA-D)

  • BBB- is lowest investment grade

  • BB+ and below high yield

• measure of an issuer’s ability to meet debt obligations

• reflects default probability and expected loss.

what are fallen angels?

Bonds that were once investment grade but have been downgraded to high yield.

4 features of sovereign bonds

• Developed market sovereigns – often AAA, lowest credit risk.

• Serve as default-risk-free benchmark.

• Widely held by foreign investors and central banks.

• Used in monetary policy for liquidity management.

how do corporate issues finance their debt for short, intermediate, and long term?

• Short-term commercial paper for working capital

• intermediate-term debt for medium-term needs

• long-term bonds for capital investments.

How does a high-yield issuer differ from an investment-grade issuer?

• Limited access to unsecured markets

• relies on secured loans

• longer-term callable notes

• generally higher default risk.

What is the primary purpose of fixed-income indexes?

• To track risk and return of bond markets

• benchmark investment performance

• provide a basis for indexed investment strategies.

How do fixed-income indexes differ from equity indexes?

• More constituents, as a single issuer may have multiple bonds.

• Higher turnover due to finite maturities and frequent new issuance.

• weighted by market value of debt outstanding rather than market capitalisation.

How often are fixed-income indexes typically rebalanced?

• Usually monthly

• to add new issues and remove bonds that fall below minimum maturity or other criteria.

What are aggregate vs. narrower fixed-income indexes?

• Aggregate indexes: Include a vast number of bonds across multiple sectors and regions.

• Narrow indexes: Focus on specific criteria, e.g., sector, credit quality, maturity, geography, or ESG.

What is the Bloomberg Barclays Global Aggregate Index?

A broad index including fixed-coupon bonds from sovereign, government, corporate, and securitised issuers in 28 developed and emerging markets,

• investment-grade only.

Bloomberg Barclays Global Aggregate Index

1. scope

2. credit quality

3. eligibility criteria

4. how often reabalanced

5. what is it used for

• Scope: Investment-grade bonds from DM and EM, across 28 currencies.

• Credit quality: Investment-grade bonds

• Eligibility: Fixed-rate, zero-coupon, or step-up coupons; minimum issuance size by market; maturity ≥ 1 year.

• Rebalancing: Monthly; cash flows reinvested.

• Use: Benchmark for funds like Baywhite Core Bond Fund (investment-grade, longer-term bonds).

J.P. Morgan Emerging Markets Bond Index Plus (EMBI+)

1. scope

2. credit quality

3. eligibility criteria

4. how often reabalanced

5. what is it used for

• Scope: US dollar–denominated debt of emerging market sovereigns.

• Credit quality: Sovereigns rated BBB+/Baa1 or below.

• Eligibility: Minimum issuance size USD 500M; maturity ≥ 2.5 years.

• Rebalancing & returns: Monthly; coupons reinvested.

• Focus: Captures higher-yielding sovereign debt with external currency risk

J.P. Morgan Emerging Markets Bond Index Plus (EMBI+)

1. scope

2. credit quality

3. eligibility criteria

4. exlusions

5. ESG rules

6. how often reabalanced

• Scope: Euro-denominated corporate bonds meeting ESG criteria.

• Credit quality: BBB-/Baa3 or higher.

• Eligibility: Minimum EUR 300M outstanding; maturity ≥ 1 year.

• Exclusions: Industries such as alcohol, tobacco, gambling, thermal coal, oil sands, military weapons, etc.

• ESG rules: MSCI ESG rating BBB+ or higher; excludes major controversies.

• Rebalancing & returns: Monthly; cash flows reinvested.

What is a primary vs secondary fixed-income market?

Primary market = issuer sells new bonds to raise capital.
Secondary market = investors trade existing bonds.

What is a debut issuer and examples?

An issuer entering the bond market for the first time.

• Companies after mergers or acquisitions

• Mature companies with stable cash flows

• Sovereign governments issuing foreign debt for first time

• transfers ownership from private to public

What are the two main methods of bond issuance in the primary market?

• Public offerings: any member of the public may buy the bonds

• private placements: only a selected investor or group of investors may buy the bonds

what is the bond issuance process

• Registration process

• Roadshows and investor presentations

• Disclosure of repayment sources and uses of proceeds

Repeat issuers have a faster issuance process.
Usually issue new securities near par value.

What is a reopening of an existing bond?

increasing the size of an already outstanding bond issue

• even if the bond price differs significantly from par

What is an underwritten bond offering?

• Underwriters guarantee sale of the bond issue.

• Offering price negotiated with issuer.

• Common for investment-grade issuers.

What is a shelf registration?

A broad registration document that allows frequent issuers to issue bonds quickly in the future without repeating the full registration process.

What is a best-efforts offering?

A bond sale where the intermediary acts as a broker and tries to sell the issue without guaranteeing the sale.

Why is high-yield secured bond issuance more complex than investment-grade issuance?

Investors analyze:

• Covenants

• Collateral

• Cash flow repayment ability

Often structured as best-efforts offerings.
Intermediary does not guarantee sale.

when are private placements used

• Small issues

• Lesser-known issuers

• Customized terms

How is sovereign debt usually issued in the primary market?

• Usually issued through public auctions.

• Managed by treasury or finance ministry.

What type of market structure characterizes most secondary bond markets?

Quote-driven or over-the-counter (OTC) markets.

Who are the major participants in secondary bond markets?

• Institutional investors

• Dealers and financial intermediaries

• Central banks

What is the bid–offer spread?

The difference between the dealer’s buying price (bid) and selling price (offer)

• a key measure of liquidity

Which bonds are typically the most liquid fixed-income securities?

• On-the-run (most recently issued) sovereign bonds

• Recently issued investment-grade corporate bonds

characteristics of liquid and less liquid bonds

Characteristics of liquid bonds:

• Active dealer markets

• Tight bid–offer spreads

• Large trading volumes

Less liquid bonds:

• Older (“seasoned”) bonds

• Lower credit quality bonds

• Infrequently traded bonds

What is distressed debt?

• bonds trading far below par.

• Occurs when issuer may default or enter bankruptcy.

Which investors are likely buyers of distressed debt?

• Hedge funds

• Opportunistic investors seeking high returns

Why might some investors be forced to sell distressed debt?

Investment mandates may restrict holdings to highly rated securities.

how does bond trading differ from equity trading when an issuer faces distress?

Distressed bonds trade until:

• Restructuring

• Liquidation

Equities are often delisted before debt stops trading.

How are prices estimated for illiquid bonds that rarely trade?

often based on similar bonds with:

• Comparable maturity

• Similar credit quality