Fixed Income Portfolios: Bonds

Bond markets are far more varied in terms of issuer and investor than the specialist money markets.There are two broad categories, domestic bond markets (which also see the issuing of what are called foreign bonds) and the eurobond market.

Domestic markets

Domestic markets trade bonds denominated in a single currency. The dominant issuer in most domestic markets will be the national government.

Government bonds have a more or less zero risk of default and this, combined with the massive volume issued and the sameness (the homogeneity) of the structure of government bonds, means they can be easily bought and sold - they are what is called, liquid.

This also means they provide a benchmark for other types of bond issue.

The eurozone 'domestic' market is an exception in that although it has a single 'domestic' currency - the euro - it contains a number of different national governments. As a result, the eurozone 'domestic' market is segmented, with the larger government issuers (Germany and France) dominating in terms of size,volumes, liquidity and benchmark yield.

The banking sector will tend to dominate a domestic market's non-sovereign issues, followed by corporate issuers. Some markets also have a significant mortgage-backed securities sector (such as US Agency and German Pfandebriefe).

Foreign bonds

Many domestic markets are also open to foreign borrowers who, although domiciled outside the country, can issue bonds in the domestic currency for sale to local investors as long as they comply with the same local regulations as their domestic counterparts.

So, a Japanese company which issues a bond denominated in sterling for sale to UK investors is issuing a foreign bond.

Foreign bonds have colourful names indicating the domestic market in which they are issued. For example: a bond issued in sterling by an issuer domiciled outside the UK is called a Bulldog; a bond issued in Yen by an issuer domiciled outside Japan is called a Samurai; and a bond issued in US dollars by an issuer domiciled outside the US is called a Yankee.

The eurobond market

The eurobond market is global distribution and trading network which brings together issuers and investors from around the world in a decentralised marketplace with no strict regulation.

Bonds could be issued in any currency, but the USD and EUR dominate.

Because the market is unsecured and free from much of the investor protection available in domestic markets, issuers must be of the highest credit quality.

Outstanding volumes tends to be dominated by international banks, then governments, supranationals and large multinationals. Bondholders are not registered, so investors have complete anonymity.