How does the Eurobond market work?
The Eurobond market is an Over-The-Counter (“OTC”) market.
An OTC market is a place where participants exchange securities directly and bilaterally with each other without the involvement of a central exchange. Once a transaction is completed, a buyer and seller exchange custody account details with each other in order to deliver the cash to the seller and the bond to the seller.
As a result, bond markets allow for a wide array of investors to participate and trade with each other. A key role is for the account of market-makers and electronic trading platforms who quote live pricing frequently in an attempt to ensure an orderly, transparent and liquid secondary market.
In the African bond market though, indicative pricing (not live) is more common given the higher risk profile of the underlying securities, the lower market liquidity and the more informal nature of some markets.
Strict regulatory, compliance and governance standards are in place in order to ensure the bond market is a safe and secure environment to operate.
What is liquidity?
Financial markets love jargon. Something is said to be “liquid” when it flows easily.
The same concept can be applied to Eurobonds when they “flow” quickly and easily from a buyer to a seller. In other words, when a Eurobond can be bought or sold without constraints, the bond is said to be “liquid”.
Liquidity is not a quantifiable term and therefore no exact formula exists to determine the liquidity of a bond or market. Nevertheless, a list of determinants that may improve or reduce liquidity is provided in the table below.
|Amount Outstanding||The more of a bond that is available, the more liquid the bond should be. In other words, the higher the amount outstanding the better the liquidity.|
|Benchmark Inclusion||Most government and corporate bonds qualify to be included into a benchmark index if the issue size is above a certain volume. The inclusion of a bond in an index deepens liquidity in that bond. A benchmark index can be tracked by funds or Exchange Traded Funds (“ETFs”) who may actively buy and sell shares in an index.|
|Complexity of bond structure||The simpler the structure of a bond, the stronger the liquidity in that bond. For example, a simple plain vanilla, fixed coupon paying bond will usually attract a large investor audience than a complicated step-up coupon perpetual bond.|
|Availability of Credit Ratings||Non-rated bonds usually come with less liquidity.|
|Series||Bonds that are globally available are believed to be more liquid than bonds that come with specific requirements regarding legal or tax thresholds.|
|Issuer Awareness||The better known and seasoned an issuer, the more market participants will get attracted to any issuance.|
|Market-making willingness||The lack of expected commercial gain could lead to an unwillingness amongst market-makers to actively advertise buy and sell quotes for a certain issuer or issuance. This can limit the flow (liquidity) in a bond. Bonds that are are expected to trade inactively, attract less market-making interest an therefore will have less liquidity. This may result in a vicious cycle.|
What are sell-side and buy-side market participants?
“Buy-side” market participants are said to be the end users or final holders of a Eurobond. Buy-side participants predominantly act a principal in transactions. End-users are predominantly investment funds, private banks or insurance companies.
In contrast, intermediaries, such as market-makers or inter-dealer/agency brokerage firms, are generally referred to as “sell-side”. Sell-side participants act as agents between buy-side or other sell-side market players.
What the difference between indicative and firm pricing?
A live price is a price that can be acted on. Live prices are mainly quoted by market-makers, electronic trading platforms and buy-side market participants.
In contrast, indicative pricing is either conditional or subject to a final call/decision.
Intermediaries, such as brokerage firms acting on behalf of clients, typically quote indicative pricing. Reason for this come from the fact that before a sale or purchase can be completed, a brokerage firm will need final client approval to act.
Common abbreviations for indicative price as Subject to Call (“STC”) or for Indicative (“Ind”). Usually an intermediary will quote these abbreviations together with an indicative price.
What are the trading hours for Eurobonds?
Eurobonds are not traded on an exchange with fixed opening hours, but traded between market participants in an Over-The-Counter (“OTC”) environment.
Trading hours are subject to the working hours of your broker or other counterparties. Usually investors use 5PM GMT/BST as an indication for African Eurobonds.