The continued rapid growth of the international bond market during 1985 was documented in a recent Merrill Lynch review. The Euromarkets encompass various types of issuers -- corporations, soverign states, banks, supranational issuers (World Bank, Inter-American Development Bank, and so forth) that issue securities in currencies throughout the world. Although the Eurobond market grew steadily in the early 1980s, it boomed in 1985. Merrill Lynch estimates that the new-issue volume of international bonds (comprising Eurobonds and foreign bonds) set a record of $168.2 billion in 1985, up 54.4 percent over 1984. That compares with the U.S. domestic volume for new corporate fixed-income securities of $106 billion. Although the center for this market is London, it is an electronic market, and it is truly international in scope.
The Merrill Lynch review lists 10 major reasons why the international market prospered so much in 1985, but the report highlights the liberalization of the capital markets worldwide as the main reason. Pressures to loosen the restrictions on and to liberalize these capital markets stemmed from the process of financial deregulation in the United States, as well as from the massive capital flows into dollar-denominated assets caused by high interest rates on these dollar-denominated securities, plus the appreciating dollar.
To recapture these international funds, major industrialized nations saw the need to liberalize their capital markets to compete for a share of this international flow of funds. Their efforts helped to open more the capital markets in Japan, West Germany, the United Kingdom, France and Switzerland. As a result, more securities were issued in the currencies of those individual countries than ever before, while on a percentage basis, the amount of bonds issued in Eurodollars declined.
Part and parcel of the same phenomenom was the agreement last fall by the Group of Five industrial nations to reduce the value of the dollar in the foreign exchange market. As investors saw the dollar declining in value, they sought other currencies they felt would appreciate in value. This in turn led underwriters to market issues in foreign currencies that investors felt would offer greater currency appreciation.
There are a host of other reasons that spurred the growth of the international markets in 1985, but here are several important ones: a) increased refinancing of outstanding bonds with lower interest rates, and in the case of floating rate notes, at "narrower" spreads; b) dramatic growth in the floating rate market; c) the emergence of a Euro-commercial paper market; d) continued growth in the interest-rate swap and currency-swap markets; e) innovative insuring techniques to meet issuer and investor needs. For example, the use of dual currency bonds; Indexed Currency Option Notes (ICONs); Eurobonds with warrants into some currency bonds, as well as different slants to the issuance of floating rate notes.
Obviously, the international bond market is a fascinating arena and its continued growth is sure to effect changes in the U.S. domestic market. Today, many of the largest issuers in the international bond market are domiciled in the United States and it is estimated that U.S. corporations issued $29 billion of fixed-income securities in the Eurobond market in 1985. A global fixed-income market is fast becoming a reality.
The Treasury will issue, in $1,000 denominations, a 7-year note on Tuesday, and a 20-year bond on Wednesday. They should return 8.9 percent and 9.45 percent, respectively.