The
Bond Market – A Multiple Dimension Of Capital Resources For Social And Economic
Developments.
The
bond market plays a significant role in the infrastructure of the economy. It helps create
new sources of fund to spur various business and social developments, create jobs, balance
government budgets, and enhance a country’s currency exchange strength as well as
competitiveness in world markets. To a greater extent, bonds help lower the cost to
taxpayers of financing the public debt, reduce the cost of a home mortgage, enable
companies to obtain capital for expansion and provide financing for a multitude of social
services in educational, infrastructure, medical, recreational, low-income housing,
pension and welfare developments that enhance the quality of life.
Basically, a
bond is a loan which is structured in a form of debt security. It works similar to a
promise note of a loan that reflects a borrower’s (the issuer of the bond) financial
obligations of interest and principal repayments during an agreed period. Different kinds
of borrowers with different asset backing may result into major structural differences in
their yield, risk, and cash flow patterns. The nature, quality of the collateralized
assets and use of fund of a bond have in fact preconditioned its credit quality and
support requirements as expected by investors.
The magnitude of bonds lies in its exposure to a huge pool of capital
resources from which issuers/borrowers can neatly tailor their specified financial needs
to match those specific expectations of different groups of investors. As compared to most
other privately issued bonds such as corporate bonds, and of course with the exception of
most government bonds which are usually backed by the full faith and credit of the
governments concerned, Asset-Backed Securities (ABS) are by far the most secure investment
product available in the financial markets in terms of payment patterns and protections.
The vast scope of bond issuers is extremely diversified that includes central
governments and their respective commercial companies and servicing agencies, local
governments, banks, private enterprises and insurance companies. On the investor side,
numerous institutions buy bonds, including mutual funds, pension funds, hedge funds,
insurance companies, commercial banks, corporations, central banks and local governments
and international investors. Individual investors also buy bonds either directly or
through mutual funds or pension plans.
As far as the bond issuers are concerned, the mega pool of capital of the
bond market enables issuers to issue a series of bonds with various maturities such as the
U.S. Treasury Bonds. The size and volume of transaction allow high liquidity in investment
activities and borderless diversity in natures as well as structures, as there are more
than 50,000 types of bonds that are trackable in the U.S. market and the daily average
volume of bond transaction exceeds US$300 billion. As for the interests of the investors,
they are comfortable with the highly liquid market environment as well as diversity and
investment diversification since they can look for the specific types of bonds that suit
their investment needs and to the extent, bonds provide more predictable investment
performance and dependable incomes than stocks.
For the private-label securities, particularly in the property development
sector, an issuer may issue the bond to finance the land during rezoning, then issue the
property bond to finance the construction and pre-sales activities after the Land Bond is
retired, and so on with the issue of the Mortgage Bond to provide financing for the
buyers. This is a typical example of how an issuer/developer can benefit from a continuous
issuance of bonds with different structures and maturities over time on the same piece of
collateralized asset.
Amongst all privately issued bonds,
Asset-Backed Securities (ABS) are by far the most
dependable bonds that secure the highest credit ratings of either double-A or triple-A
from major credit rating agencies like S & P and Moody. The estimated outstanding
volume of ABS issued in the United States today amounts to be in trillions of dollars.
For the market of Hong Kong, bond trading can be started off at a more
regulated nature from which stable interest income and predictable cash flow predominantly
shape the structure of a bond at the developing stage. It is important to build up
investors’ confidence in the stability and safety of bond trading and therefore, the
simpler it is structured the better. Since the property market is the biggest investment
market in Hong Kong and the rest of Asia, the introduction of Land, Property and
Mortgage-Backed Securities will surely arouse significant interests from the investment
and financial markets.
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