Bonds, money markets, capital markets, and financial organizations 249
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Figure 11.3 Ten years of total outstanding amounts and gross issues of securities other than
shares issued by euro area residents. (Presentation aimed at underlying trend, based on ECB
In the United States, ten-year government bond yields increased sharply, by around 70
basis points, between the end of March and 5 May [2004]. Most of the increase occurred
in early April, following more favorable than expected US labor market developments. In
the euro area [yields] increased by 25 basis points between end-March and 5 May and
ended the period at 4.3% . . . The increase in long-term government bond yields in April
[2004] seemed to a large extent to be a reflection of developments in the United States.
This direct quotation describes in a very pragmatic way the impact of globaliza-
tion on bond markets. Within regional markets, as well, total gross issues and total
outstanding amounts are rising. As Figure 11.3 shows, based on statistics by the
ECB, the total outstanding amount in euro is rising faster than total gross issues,
which demonstrates that the size of each debt issue is also significantly increasing.
11.3 Importance of the money market
Reference has been made in the Introduction that the money market has preceded the
capital market by several centuries. Today, one way of looking at the money market
is as the short-term counterpart of the capital market where long-term financial con-
tracts are traded. Nevertheless, as we have seen with floating rate notes, a clear divid-
ing line between the short- and long-term areas cannot be drawn using economic
criteria because, in the last analysis:
Short-term and long-term are determined subjectively by jurisdiction, and
Much depends on the planning horizon of economic agents, and on the way they
structure and trade their instruments.
In principle, deposits, advances, and short-term loans are issues which interest the
money market. The common practice is that statistics concerning maturities of one
year or less belong to the money market. This definition, however, is elastic, since
250 The Management of Bond Investments and Trading of Debt
some reserve banks, Banque de France and Banca d’Italia being examples, put the
short term at 6 months.
In a broad sense, the money market denotes all available facilities for borrowing
and lending money within the timeframe in reference. In certain cases, this tends to
include also longer-term borrowing or lending. Increasingly, however, economists and
bankers refer to the market for long-term funds as the capital market, restricting the
term money market to the market for short-term money. In this latter case, the money
market consists of two sectors:
The direct, or customers’ loan market, characterized by the close and personal
connection between borrowing customers and their bank, and
The indirect, or open money market, with objective relations between borrower
and lender, where the loan is usually negotiated through intermediaries and the
lender and borrower do not meet.
With this distinction, the indirect money market is impersonal and it is not
necessarily formally organized. This means that, for the most part, there is no well-
established meeting place, like an exchange, at which intermediaries come together.
An example of buying and selling securities in a formal meeting place would be the
stock exchange.
The way it works with all open markets, there is a group of borrowers in the
money market providing demand for funds, and competing among themselves for
financial resources. There is also a group of lenders providing supply of money, com-
peting in the placement of their funds. Moreover, there is a group of intermediaries,
who act as brokers, providing facilities for bringing together the bids and offers of
borrowers and lenders:
The money market provides an outlet for demand and offer of funds, and
Negotiations are carried on in the offices of brokers, dealers, and bankers or
through the use of on-line facilities.
Through money market transactions, funds are made mobile. Both borrowers and
lenders, therefore debtors and creditors, obtain access to the money market which
may operate on a local, regional, national or global scale. The more financial transac-
tions get internationalized, the less the money market has geographical boundaries –
unless different jurisdictions impose artificial ones, largely related to their currency.
Market transactions are used by market participants, such as commercial and
investment banks, insurance firms, manufacturing companies, service enterprises,
public authorities, or institutional investors, for liquidity management. An important
distinction is between:
Money market transactions, which are central bank money, such as credit balances
with the central bank, and
Those involving transactions based on bank deposits, which enable non-bank enti-
ties to synchronize their payment flows.
But to face some of their clients’ currency needs, and to comply with their mini-
mum reserve requirements, credit institutions additionally need central bank money.

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