Types of Bonds Flashcards
What are government bonds issued for?
Government bonds are issued to fund budget deficits and to finanace projects
Why aren’t government bonds considered risk-free?
Argentina for example defaulted on their debt and Liz Truss caused the value of gilts to plummet.
How much global bond issuance is from EMs?
About 25%
Can be issued as “Hard currency”
What are Gilts used for?
What forms can they be issued in?
To fund the PSNCR
They can be
1)Conventional
2)Linkers
3)STRIPS
4)Dual-Dated
5)Green Gilts
How are Gilts Issued and who are they issued on behalf of?
On behalf of the HMT by DMO
Via Weekly Auctions
Auctions can be competitive or non-competitive, what’s the difference?
Competitive - Pay the price you bid
Non-competitive - Pay the price weighted average (up to £500,000)
What is the post auction option facility? PAOF
The option to allow an additional 25% to be purchased following a “succesful auction”
A succesful auction is a bid to cover ratio of >2. (failure if <1)
What are the 3 main actors in UK govt bond issuance?
Primary Dealers
Broker Dealers
InterDealer Brokers
What is a primary dealer?
An approved financial institution that trades securities with the Govt, with the intention of seling the securities onto others.
Primary dealers must quote two way prices in the Govt bond market.
What are the obligations of a primary dealer?
1) Make effective two-way prices to clients (providing liquidity)
2) Participate in bond issuance programmes by bidding competitively
3) Provide information to issuer on closing prices, market conditions etc.
There are exceptions to the requirement to make two-way prices to clients including the members of
the LSE. The obligation does not include quoting to other GEMMs, fixed-interest market makers or gilt
IDBs.
What are the privileges of being a primary dealer?
Executive rights to telephone bidding at Government bond auctions. (either for themselves or for clients)
Exclusive facility to trade as a counterparty of issuer in secondary markets
Exclusive access to inder-dealer broker screens
What is a broker dealer?
1) Acts as a broker for their own clients (agent)
2) Acts as a dealer on their own account (principal)
Tends to be large financial institutions.. e.g. Banks
They facilitate the free flow of government bonds in the open market
What rule are broker-dealers bound by?
Best Execution rule
to get the bestavailable price at the time, taking into consideration factors such as speed and likelihood of execution).
When getting a quote from a primary dealer, what must the broker-dealer identify at outset?
If the trade is a small one <1m nominal
