New Strategies for Emerging Domestic Sovereign Bond Markets in the Global

Total External Sovereign Debt 

0

5

10

15

20

25

30

35

40

45

50

1998

1999

2000

2001

2002

2003

2004P

2005E

2006E

Per

cen

ta

ge of

 G

D

P

Latin America

Emerging Europe 

Emerging Asia

Total Emerging Markets

 

 

Source: OECD Development Centre, 2007; based on IMF data, 2006. 

G

RAPH 

14:

 

I

NCREASING 

D

OMESTIC 

D

EBT 

M

ARKETS

:

 

L

ATIN 

A

MERICA AND 

A

SIA 

(

IN 

$

 BILLIONS

) 

 

0

200

400

600

800

1000

1200

1400

1600

1800

19

8

9

1991

19

9

3

  1

994

-0

6

  1

994

-1

2

  19

9

5-

0

6

  19

9

5-

12

  1

9

96-

0

6

  19

9

6

-12

  19

9

7-

0

6

  19

9

7-

12

  19

9

8

-0

6

  19

9

8

-1

2

  1

9

99-

0

6

  19

9

9

-12

  2

0

00-

06

  2

0

00-

12

  2

0

0

1-

0

6

  20

0

1-

12

  2

002

-0

6

  2

002

-1

2

  2

003

-0

6

  2

003

-1

2

  2

0

0

4

-0

6

  2

0

0

4

-1

2

  2

005-

0

6

 B

illi

o

n

s o

f U

S

 D

o

lla

rs

 

Latin America (7  biggest issuers)

Emerging Asia (7  biggest issuers)

  

 

Source: OECD Development Centre, 2007; based on BIS, 2006. 

 

33

Blommestein and Santiso: New Strategies for Emerging Domestic Sovereign Bond Markets

Published by The Berkeley Electronic Press, 2007

---

G

RAPH 

15:

 

I

NCREASING 

D

OMESTIC 

D

EBT 

M

ARKETS

:

 

L

ATIN 

A

MERICAN AND 

A

SIAN 

(

IN 

$

 BILLIONS

) 

 

Latin America (2005)

0

100

200

300

400

500

600

Brazil India Mexico

Chile 

Colombia 

Argentina 

Peru

B

illi

o

n

s o

f U

S

 D

o

lla

rs

  

 

 

Asia and Pacific (2005)

0

100

200

300

400

500

600

700

South

Korea

China

Malaysia

Thailand Singapore Indonesia Philippines

B

il

li

o

n

s 

o

f U

S

 D

o

lla

rs

 

 

Source: OECD Development Centre, 2007; based on BIS, 2006. 

34

Global Economy Journal, Vol. 7 [2007], Iss. 2, Art. 2

http://www.bepress.com/gej/vol7/iss2/2

---

G

RAPH 

16:

 

L

ATIN 

A

MERICAN 

D

EBT 

S

ECURITIES 

M

ARKETS IN 

2005

 

(

AMOUNTS 

OUTSTANDING

,

 IN PER CENT OF 

GDP) 

Latin America

0

10

20

30

40

50

60

70

80

90

Brazil

Chile

Colombia

Mexico

Argentina

Peru

% o

f G

D

P

   

Government

Total

 

Source: OECD Development Centre, 2007; based on BIS, 2006. 

Another key success indicator is the lengthening 

maturities along the yield 

curve. Maturity is influenced by both demand and supply factors. The latter is 

directly linked to implications of the risk-based approach to the debt strategy for 

the issuing strategy and the resulting optimal portfolio. The influence of demand 

factors is driven by investors’ assessments of fundamentals and risk preferences. 

As a percentage of total domestic emerging market debt, bonds that have a 

residual maturity up to one year declined from 44 per cent in 1997 to 25 per cent 

in 2004.  Several Latin American countries have made dramatic progress. For 

example, in 2005, Mexico issued a 20-year bond, while 10 years before it was 

only possible to issue securities with maximum maturities of around 6 months. It 

is currently considering issuing a 30-year bond. Chile has been issuing during the 

last five years securities with maturities up to 10 years, up from 12 months in the 

past. Also Brazil, Columbia, and Peru have made considerable progress issuing 

10-year 

global  bonds in local currency, 15 year bonds and 20 years bonds 

respectively. The achievement of Peru is particularly significant given the high 

degree of dollarisation of the country. In contrast, maximum maturities fell in 

Argentina and Venezuela. Maturities

  of  local bonds remain, however, 

considerable shorter with maturities of 6.5 years on average for a country like 

Mexico.

48

 

                                                      

48

   

Figures calculated by Merrill Lynch for mid-2006.

 

35

Blommestein and Santiso: New Strategies for Emerging Domestic Sovereign Bond Markets

Published by The Berkeley Electronic Press, 2007

---

Liquidity is another crucial indicator to gauge the results of reforms in this 

area. For example, many Latin American countries have made considerable 

progress in the period 1997-2005. Secondary market trading in domestic bonds 

expanded but remained however far below activities in mature markets. 

According to the Emerging Markets Trade Association (EMTA), yearly trading 

by its members banks in the domestic markets of the seven largest economies of 

the region, barely reached 1.6 times the outstanding stock of securities in 2005, 

remaining far below the 22 times reached in the highly liquid US Treasury 

market. Two widely used measures of liquidity are bid-ask spreads and market-

depth. Like maturity, also liquidity is influenced by demand and supply factors. 

On the demand side, liquidity is negatively affected by a narrow investor base (as 

measured by the concentration of bond holdings). There is empirical evidence that 

a concentration of bond holdings is associated with wider bid/offer spreads 

[Table1]. On the issuer side, liquidity is directly influenced by the 

size of 

individual issues as well as the 

overall size of the bond market. There is also 

evidence [Table 1] that positive liquidity premium exists only for individual 

issues and overall markets of sufficient size. Moreover, the overall size of the 

market has been associated with greater market depth (measured as higher trade 

volumes), while greater market depth correlates with tighter bid-offer spreads 

[Table 1]. The relationship between liquidity on the one hand, and issue size and 

overall market size on the other, are to some degree relative concepts. Table 1 

provides minimal thresholds (based on information from mature markets) where 

individual issues and bond markets are considered as “liquid”.    

36

Global Economy Journal, Vol. 7 [2007], Iss. 2, Art. 2

http://www.bepress.com/gej/vol7/iss2/2

---

 

T

ABLE 

1:

 

S

UPPLY AND DEMAND DETERMINANTS OF BOND MARKET LIQUIDITY