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Showing results for tags 'local currency bonds'.
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Peter Eerdmans is an economic prophet, “As interest in emerging market debt grows, bond markets are developing in size, depth and liquidity. Some countries such as Lebanon, Iraq, Tunisia, Panama and Guatemala only issue dollar government bonds but Mr Eerdmans expect this to change in the next decade to include issues in local currencies.” (read more: Interest in local currency bonds rise) Hello again my friends! There is so much talk in the news surrounding bond issuance that I thought I would take an opportunity to elaborate and give my short take on what it is I believe the GOI is doing. But first a quick educational session so that we are all up to speed. A government will be the issuer of a bond when it is looking to borrow money. The GOI sells the instrument and redeems it at a later date in time at a predetermined or fixed rate. At the end of the term (maturity) the investor cashes in the bond for the fixed amount. This is why monies received from bonds are called “fixed income” to the investor. For our purposes we will discuss EMLCB or Emerging Market Local Currency Bonds. What we see transpiring in Iraq is for all intents and purposes unprecedented because it is for the first time issuing EMLCB or another common phrase “emerging local market bonds.” Previously Iraq only issued bonds denominated in foreign currency (usd). Now we see them issuing bonds denominated in the iqd. Within the last couple of weeks we see both types of bonds being made available to add liquidity to the economy. The question many probably have is why LCBs? Issuing a bond in foreign denominations is a no-brainer as the investor is assured of the stability of the currency in which the bond is denominated….for Iraq it is the usd. Purchasing bonds in local/domestic currency serves a 2 dimensional purpose, 1) the hopes of receiving a fixed income upon bond maturity (same as foreign denominated bonds) and 2) the hopes of receiving capital gains if the domestic currency appreciates in value J Point #2 is the ONLY reason a foreign investor will purchase an EMLCB when they have the option of purchasing a less riskier foreign currency denominated one. Lastly, so that people don't think I am pulling my takes out of a hat, these bullet point items were taken from Investec's report "Emerging Markets Debt: the next 10 years": Borrowers would rather repay debt and interest in the same currency as their income. As international lenders gain more trust in the credibility of monetary and fiscal policies, they become increasingly willing to lend in local currencies Local currency bond issuance to dominate in an increasing number of emerging markets Economic growth, macro and political stability and market liquidity attract international investor interest as new markets present opportunities for diversification and potentially higher returns; We see the current trend of increasing foreign participation in emerging bond markets continuing at a steady pace – although not quite reaching developed market levels over the next ten years. I tried keeping it as short as possible while covering pertinent points. Thanks for reading, your mileage may vary . Be blessed my friends!
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