Module 51: Fixed Income Market for Government Issuers Flashcards
(25 cards)
What is Soverign debt
National governments issue bonds to raise funds for spending on public good, services and investment infrastructure.
*Typically the largest debt issuers in the market.
What are the sources of repayment of Soverign Debt
- Taxes
- Cash Flows from State owned enterprises
What are issues with Soverign Debt
There’s a lack of standardised accounting standards
What is the split of Soverigns?
Emerging Market Issuers or Developed Market Issuers
What are developed market sovereign issuers?
- Stable, diversified economies with a consistent tax flows and spending (fiscal Policy)
- Government debt will typically be nominated in multiple currencies (held as a reserves globally)
- Seen as default-risk free
- Can be issued with any sort of maturity
What are emerging Market Issuers
- Associated with Less Stable and less diversified economy
- Less stable tax revenues
- Priority of the government is for economic and social growth
- Can be Domestic and External Debt
What are Domestic Debt and External Debt
Domestic Debt: Debt issued in the nations home currency, but might not be freely convertible into other currencies (limits the amount of foreign investment)
External Debt: Held by foreign investors and is typically issued in a foreign currency (or domestic currency).
What is the composition of government debt?
Short-term gov debt: 1-12months (Treasury Bills) - issued with a zero coupon rate
Medium Term (Treasury Notes), Long Term (Treasury Bond)
- Denoted with a fixed coupon.
What is Ricardian Equiavlanece?
Ricardian Equivalence: If you fund the deficit with debt, the deficit will need to be paid off in the future (meaning more taxes in the future) - so people will be aware of futre
Whats the benefit of short term debt rather than longer term?
Short term: Safe and Liquid, meaning lower yields and potentially more rollover risk
Whats the benefit of long term debt rather than shorter term?
Establishes risk free benchmark for different maturities
Used in hedging interest rate risk as it doesn’t have a value that’s to do with credit risk
Preferred Collateral in Repo and Derivative Trades
Used by central banks to conduct Monetary Policy sells or buy bonds (to inject or withdraw liquidity from the economy)
What is non soverign gov bonds
Bonds issued by states, provinces, counties, and entities created to fund and provide services (e.g., hospitals, airports, municipal services).
What are agency/quasi-government bonds?
Bonds issued by entities created by national governments for specific purposes (e.g., infrastructure investment, mortgage financing). Example: Ginnie Mae (USA). Often backed by the sovereign entity.
What are the two main types of bonds issued by local/regional governments?
- General obligation bonds (GO bonds): Backed by local tax raising powers, for general public spending.
- Revenue bonds: Fund specific projects, repaid by fees from the project’s use (e.g., toll roads).
What are supranational bonds?
Bonds issued by international institutions (e.g., World Bank, IMF, Asian Development Bank) established by multiple governments to promote economic cooperation, trade, or growth. Typically high credit quality.
How do corporate and government debt issuance differ?
Corporates issue debt as needed, while sovereigns use regular public auctions.
What are the two types of bids in government bond auctions?
Competitive bids: Used to set the price/yieldNon-competitive bids: Guaranteed allocation at the price set by competitive bids (from non large corporates).
Describe the process of a government bond auction.
- Allocate to non-competitive bids.
- Rank competitive bids (highest price/lowest yield first).
- Allocate to competitive bids until the offering amount is met. The lowest successful competitive bid sets the cut-off yield.
What are single-price and multiple-price auctions?
Single-price: All investors pay the price at the cut-off yield. Multiple-price: Successful bidders pay the price they bid.
Why might a government choose a single-price auction?
To minimize yield volatility, potentially increasing the chance of a successful auction, broader distribution of bonds, and lower cost of funds.
What is the role of primary dealers in sovereign debt markets?
Financial institutions who make competitive bids, submit bids for third parties, and act as counterparty to the central bank for monetary policy operations.
How does sovereign debt typically trade after issuance?
In quote-driven OTC dealer markets, similar to corporate bonds.
What are on-the-run bonds?
Most recently issued government securities of a particular maturity. Their yields are often used as benchmark yields.
What are some non-economic objectives of government bond investors?
Monetary policy (central banks), reserves (foreign governments), regulatory compliance (financial institutions). These can lower sovereign bond yields compared to non-sovereign issuers.
