Building a Successful Bond Market

 Building a Successful Bond Market

  

News recently in from the UAE is that the Central Bank is actively lobbying for the establishment of a bond market in the United Arab Emirates. A domestic bond market is OTC Markets Investor Relations Firm  an effective mechanism for raising funding and, for that reason, it can be a positive addition to the financial landscape in any country. However, the success of a bond market depends on the correct institutions and regulatory structures being in place right from the start.

What then are the key prerequisites for the establishment and development of a successful bond market?

Bond markets are usually differentiated into a primary market, in which bonds are first issued, and a secondary market, in which they are traded. In the primary market, the most important issue is to ensure that the bonds are correctly priced.

To elaborate, all corporate instruments are typically priced at a premium to the risk-free yield curve. In most instances, this risk-free curve is the yield at which the sovereign issues its debt. In the UAE, as in other bond markets, sovereigns will need to support the creation of a yield curve by issuing securities of appropriate maturity. This will be vital to the success of the proposed bond market, and should occur regardless of whether or not sovereigns needs to issue for funding purposes.

The next important step will be to build the yield curve, and in new markets the key issues are usually concentrated at the shorter end of the curve. This is often because banks need short-dated instruments to meet their liquid asset requirements, and because confidence in longer-dated instruments takes some time to build up. In the early stages, dialogue with the institutional investor market is essential, as sovereigns needs to match supply with demand and to issue at a tenor that meets the liability-matching requirements of the institutional investor.

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