Building resilience in the global bond markets

by Bryan Pascoe

Markets in financial assets are proving increasingly difficult to navigate around and predict, at a time when market access and consistency are critical to provide the tools for cohesive economic growth and stability. The bond market is arguably the most critical, fundamental and pervasive element within the interwoven international financial system, and with that in mind I would like to reflect on the topic of building resilience in the global bond markets, a key issue which is increasingly keeping policy makers, regulators and market participants of all kinds awake at night. I will touch on several points: Firstly, the role played by ICMA in the international bond markets. Secondly, the essential role and importance of the bond markets in financing long-term sustainable growth for the real economy in a flexible way providing a broad range of funding sources. Thirdly, some of the issues and structural weaknesses we have seen emerge, particularly in recent times, which have brought into question the robustness of the bond market as a reliable, consistent and effective means of connecting users and providers of debt capital, and that acts as a source of economic stability. And finally, developments and undertakings that are in train to help build the market’s structural and operational resilience and flexibility.

At ICMA, we are a Zurich-headquartered trade association with offices in London, Brussels, Paris and Hong Kong, focused on the fixed income markets and operating across primary, secondary and repo and collateral markets, with sustainable finance and digitalisation embedded as key themes and drivers across all our areas of market operation. In sustainable finance in particular you may already be familiar with our work and market leadership position as the Secretariat for the Green, Social, Sustainable and Sustainability-Linked Principles which act as the go-to standard for international best practice in the debt capital markets, and on which the Green Loan Principles are based. We have over 600 members in 65 countries globally representing all players in the market – issuers, underwriters, traders and brokers, investors, market infrastructure providers, rating agencies, law firms, tech solution vendors and official institutions. In that sense we truly are the voice of the bond markets. And in Asia-Pacific our footprint is strong and growing, with over 80 members in 13 jurisdictions. Our mission is to provide effective and focused advocacy with key regulators and stakeholders on behalf of our members, and symbiotically, to set frameworks and standards for best practice across all areas of operation. Examples of such standards include our Primary Market Handbook for bond issuance best practice, Secondary Market Rules and Recommendations which provide the framework for trade and settlement dispute resolution, and the Global Master Repo Agreement and associated legal opinions, providing the documentation underpinning the majority of the international repo market activity. In this regard we have a central role to play in promoting, supporting and driving efficient, robust and resilient cross-border bond markets.

Turning now to the bond markets more broadly. The size of the international bond market is vast, with over US$130 trillion equivalent outstanding across sovereigns, supranationals, agencies, corporates and financials, providing typically a huge amount of flexibility in currency, maturity and size of issuance which is of critical importance in managing investment, financing and redemption profiles. The US bond market remains by far the largest representing around US$45 trillion of total issuance, with China now the second largest market at around US$25 trillion and the European Union – to the extent it can be considered as a single market – in third. Sovereign bonds, financing budgets, infrastructure and social programmes account for around 75% of total global issuance. Notably, the markets have expanded significantly since the global financial crisis in 2008, and subsequently the European sovereign debt crisis around 2012, with a significant expansion in the market for credit and corporate bonds in addition to government bonds. In Asia, for example, until recently we saw huge growth in the appetite for and issuance of high-yield bonds, and in the emerging markets more broadly overall outstanding debt volumes almost trebled in the 10 years to the end of 2021 standing at over US$3 trillion of international issuance. This has been supported on the investor side by the proliferation of bond funds and ETFs, increased involvement from private