Title: Bond market development: what are the policy issues Philip Turner Presentation at the Brookings Inst
1Bond market development what are the policy
issues?Philip Turner Presentation at the
Brookings Institution/IMF/World Bank Conference
on Future of Domestic Capital Markets, 14-16
April 2003, Washington DC
2Bond markets essential.to generate market
interest rates that reflect the opportunity cost
of funds across the maturity spectrum
3Good news Domestic bonds outstanding doubled to
2,000 billion in six years
- Lower inflation
- Government borrowing strategy
- Financial liberalisation
- A start made to develop pension funds in some
countries
4Bad news Liquidity remains poor.
- Why?
- Short answer difficult policy dilemmas resolved
in ways that impede bond market development
5Consider 4 aspects
- Fragmented issuance
- Official smoothing of interest rate volatility
- Lack of diversified investors
- Lack of mark-to-market rules
6I Fragmented issuance of public sector bonds
- Fear of failure of one large issue
- Nature of bonds
- Different public sector bonds
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8II Official smoothing of volatility
- New or thin markets often exhibit an extreme
volatility. - raises risk premium - risk of
self-fulfilling expectations - Hard for private investors to manage because
short-term interest rates very volatile - BUT
- Government know best?
- Private firms become addicted to government
support
9III Lack of diversified investors
- Government pension funds are captive investors
who hold to maturity need private funds - Mutual funds restrictedand focus on equities
- Foreign investors scarceeven after deregulation
10IV Lack of mark-to-market rules
- Rationale discourage short-termism
- Quid pro quo for captive market rules
- BUT
- Disguises balance sheet problems
- Inhibits learning about risk management
- Discourages trading
11Challenges to banks as bond markets develop
- In emerging markets, banks major holder of bonds
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13Banks must
- Imbibe an investment banking culture
- Exploit possibilities of securitisation
- Learn to manage interest rate risk
14Conclusion
- Many easy reforms accomplished think hard
about dilemmas - An inward-looking or an outward-looking strategy?