Forex Talking

National government bond markets in Europe and Japan follow a structure similar to that of the U.S. Primary dealers participate in auctions and then distribute bonds to institutional and retail investors. The auction procedures vary a little. While France and Germany follow the single-price Dutch auction based on a published calendar, the Bank of England uses an ad hoc auction system, where the maturity and the total amounts of the securities are announced only at the time of the auction.

This allows greater borrowing flexibility and leads to less yield volatility in the markets, as old issues are not dumped in favor of new known ones prior to an auction. Some governments use a multiple-price Dutch auction similar to that used in the U.S. prior to the 1990s where competitive bids are awarded at the actual bid yield. Several governments, like the U.K., the Netherlands, and the U.S. have also used a tap system by reopening old issues at auctions. Many governments do not issue a great variety of maturities of bonds. In Germany and Japan, the longest benchmarks are 10-year bonds with no intervening, liquid on-the-runs. Several governments issue inflation-linked securities. In the U.K., index-linked gilts have coupons and final redemption amounts linked to the retail price index (RPI); Canadian and Australian governments have issued bonds linked to national inflation indices. The U.K. government also issues short-term bonds called convertibles which give the holder the right to convert to longer maturity bonds.

Government bonds around the world have easily recognizable nicknames. Among the major ones, U.K. bonds are called gilts and German bonds are referred to as bunds. These serve as benchmarks for pricing corporate bonds and swaps in the national markets and nearby (Swiss swaps are priced off bunds).

Secondary government bond markets around the world differ substantially in terms of their liquidity. The turnover ratio is the greatest in the U.S. where more bonds are traded every day than the total amount outstanding. The U.S. also enjoys the smallest bid–ask spreads (less than 3 basis points). By contrast, the Swedish, Swiss, and French markets trade with spreads of 10 or more basis points.

In any given year, the policies of central governments as to the overall new issuance and its composition differ across countries. For example, in the early 2000s, while the governments of Australia, Sweden and the U.S. were paying off their debts and shortening the maturity of their overall debt, Japan, France, and Spain were stepping up new issuance.