• Friday, March 01, 2024
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The Bond markets role in economic growth


The value of the global Bond market dwarfs the global equity markets, showing the importance of bonds to economic growth and development, which is often overlooked by a focus on the more exciting equity markets.

Research firm, McKinsey & Co put the value of global bonds at $157

Trillion out of the total $212

Trillion of capital stock (bonds and stocks) with stocks at $54 Trillion.

That puts bonds at about 75 percent of capital, and stocks at about 25 percent of capital globally at the end of 2010.

The bond markets is the avenue for raising long term funding for Governments, regions, municipals and private and public companies andthe movement in benchmark bond yields is often an indication of the health or otherwise of the issuer.

The direction  of the movement in bond yields may also show the level of fund flows and movement in global capital since the Bond markets are much deeper than equity markets.

As a proportion of global Gross Domestic Product (GDP), the bond market increased to 130 percent in 2010 from 119 percent in 2008 and 80 percent a decade earlier.

 The Growth of the market since the start of the economic slowdown in

2008 was largely a result of an increase in issuance by governments, with government bonds accounting for 43 percent of the value outstanding at the end of 2010, up from 39 percent a year earlier.

 Separate data about the United States (US), puts the bond market there at just under $37 Trillion (including municipal bonds) as of the end of 2011.

US bonds are about 23.6 percent of the worlds outstanding bond issues.

In Nigeria the size and sophistication of the bond market has beenincreasing since 2004.

The domestic debt stock outstanding as at September 2013 (excluding AMCON bonds) is equivalent to N7.63 trillion ($47.6 billion) made up of FGN bonds and Treasury bills N7.03 trillion ($43.9 billion), and State or sub-national bonds N595.5 billion ($3.72 billion), according to data from the DMO.

 The domestic debt stock made up 18 percent of Gross Domestic Product (GDP) as at year end 2013.

 The announcement on the lifting of the minimum one year holding period restriction on FGN bonds by Governor Sanusi Lamido Sanusi in 2011 made offshore investors more comfortable about investing in Nigeria, leading to the more sizeable portfolio inflows.

 The monetary tightening put in place by the CBN has also led to higher yields on Nigerian fixed income securities which has attracted foreign investors playing the carry trade on naira denominated assets.

 These actions inevitably led to the inclusion of Nigerian bonds in the JP Morgan emerging markets index which has aided NGN stability and benign inflation expectations.

The size of the Nigerian domestic bond market while small ($47

billion) compared to South Africa ($184 billion), is growing fast, and the value of transactions in the domestic fixed income market is up four folds since 2006, reaching a value of N14.7 trillion at the end of 2010, according to data from investment firm Vetiva capital.

A deeper and more liquid Bond market will help Nigeria to finance the huge infrastructure deficit the country currently faces, the cost of which will be at least $20 billion a year, or up to $200 billion in the next 10 years according to the Urban Development Bank of Nigeria.

It will also help Nigerian private sector companies to more easily raise long term capital, which they can then deploy to create Jobs and employment.