For the past few years domestic bond markets in Latin America have significantly expanded. There have been much progress made but susceptibility associated with refinancing risk stands out and a secondary market continues to suffer from low liquidity. In Latin America domestic bond markets have remained underdeveloped calling for more structural and policy barrier. There have been poor records on macroeconomic management with no expansion and deep investor base. There is also no regulatory embargo which prevents primary and secondary growth of market activity.
In addition, there is lack of sufficient infrastructure for issuance of private sector debt (Jeanneau and Tavor, June, 2006, p. 51). In Latin America economies there is a source of financing constituted by domestic bond markets with allocation of global investors. Expansion of markets show conscious efforts made by authorities in reducing susceptibility in unfavorable external shocks. Strengthening of demand conditions should be the main objective for domestic debts.
Transition of more stable macroeconomic policies, elimination of embargo on foreign investments and moving to privately funded and managed pension have been used in achieving objective of domestic debts. In Latin America issuance of domestic securities have been extended and domestic markets debts widely vary. Public sector issuers dominate domestic securities markets and a short-term inflation indexed securities and floating rate continues to account for large shares of the extraordinary domestic government securities stock. There has been a significant change on composition of government debts (Jeanneau and Tavor, June, 2006, p.
54). Commercial banks have dominated intermediation process making securitization a recent incident. Expansion of local bond markets is determined by sustainability of international process of portfolio diversification. The factors supporting growth of bond markets in Latin America have a permanent nature. Integration of mature and emerging market economies has been a secular process comprising of low cost and real-time information on performance of firms and nations (Jeanneau and Tavor, June, 2006, p. 59). Cumulative returns of Latin America exceed those of other emerging markets.
Currency mismatches are reduced by domestic bond markets with the advancement made towards establishing the markets helping in decreasing mismatches of currency in the region. Change from external to domestic debts replaces risks of currency disparity with that from maturity disparity. There is improvement on economic environment but investors in some states are still unwilling to entrust their money to local currency debts at fixed rates for long-term (Jeanneau and Tavor, June, 2006, p. 61). Since active markets are important requirement for money-making position there is more concern on the low level of secondary market trading.
Large changes on market volatility and prices can be induced by poor liquidity. For functioning of modern risk management systems there is need for liquid financial markets. This depends on derivation of correct landmark rates for pricing portfolios and achieving a smooth running of markets for frequent rebalancing of positions. Market liquidity is associated with the size of the bond market and its individual issues being termed as determinant of its liquidity and depth (Jeanneau and Tavor, June, 2006, p. 62). Market liquidity can be determined by type of securities in the market.
Indexed securities can be held until maturity with less active trade and liquid than instruments on money markets. The breath of investors’ base is the most significant thing with move to pension systems privately funded increasing demand for local securities (Jeanneau and Tavor, June, 2006, p. 63). In conclusion economies of Latin American have significantly improved in expanding their domestic bond markets. There are some challenges with the most pressing one being need to decrease susceptibility on debt structures to increase liquidity of secondary markets and refinance risk.
Questions 1. Is there any improvement on Latin American economies on their domestic bond markets for investors to entrust their funds? 2. Do domestic bond markets in Latin American require risk management systems for liquid financial markets? 3. What kind of securities is required to determine market liquidity? List of References Jeanneau, S. & Tavor, C. (June, 2006), “domestic bond markets in Latin America: achievements and challenges,” BIS Quarterly Review, pp. 51-64