International Perspectives on Foreign Bond Markets

Abstract

While the domestic bond markets of Asia-Pacific have grown considerably since the Asian Financial Crisis of 1997, it is clear that they remain undeveloped relative to the region’s weight in the world economy. This paper adds to the policy debate on this issue by proposing that in order to encourage further development in these markets, regulators should make them more accessible to foreign borrowers.We offer insights into the nature and mechanics of foreign bond issuance in domestic markets by investigating the key characteristics of 3,132 foreign bonds issued in 14 countries (other than the US) between 1928 and June 2009. We find that the foreign borrowers that tap domestic markets are overwhelmingly high credit quality and comprise sovereigns, supranationals, and major financial institutions. Although there is a significant corporate presence, usually by non-bank financial institutions, issuance by this sector tends to have a shorter maturity and generally carry lower credit ratings. There is a preference for simple fixed-rate payment structures, which can then be swapped into the currency and coupon type of choice using currency and interest rate derivatives. On the whole, the long-term viability of foreign bond markets appears to be linked to the presence of highly liquid foreign exchange and derivatives markets that facilitate risk management and transformation, enabling regulation that facilitates cooperation with market participants, the presence of benchmark issues, and competitive pricing between alternate market segments.