An Introduction to International Capital Markets: Products, Strategies, Participants, Second Edition

4

Major Government Bond Markets

4.1 CHAPTER OVERVIEW

This chapter explores the market for major government bonds, in particular those issued by G7 countries such as the US, the UK, Japan, and countries in the eurozone. It considers issuance procedures and trading methods in the secondary markets. The most active government bond market is the market for US government debt, and many of the conventions used there have been exported around the world. For example, UK government bonds (gilts) and government bonds issued in the eurozone now use the day-counting convention developed in the US market. The chapter looks at how bonds are quoted and valued using discounted cash flow techniques. Two measures of bond yield or return are introduced: current or running yield, and yield-to-maturity. Finally, investors in government bonds cannot ignore the possibility that governments may default on debt obligations, or at least seek to reschedule payments. The risk of default is very low in the case of US debt but can be substantial with bonds issued by developing countries. The chapter explores sovereign risk and the credit rating of sovereign debt by the major agencies.

4.2 INTRODUCTION TO GOVERNMENT BONDS

Bonds are long-term negotiable debt securities issued by governments, government agencies, financial institutions, and corporations to raise debt capital. The majority are straight or ‘plain vanilla’ bonds which:

• pay fixed interest amounts - known as coupons - on regular dates;

• have ...