Overview of the bond market

25 Nov, 2022 - 00:11 0 Views
Overview of the bond market An investor in a bond knows exactly what return they will make (coupon) and when it will be repaid (maturity date)

The Herald

Lloyd Mlotshwa
In the light of the upcoming listing of the Karo Mining Holdings (KMH) bond on the VFEX, this article is going to provide an overview of the bond market.

What are bonds?

In very simple terms, a bond is a type of investment in which the investor lends money to a borrower with an expectation that the money will be repaid at an agreed interest rate after an agreed period of time. An investor in a bond knows exactly what return they will make (coupon) and when it will be repaid (maturity date). This makes bonds favourable to hold in a portfolio as they offer stable returns relative to equities and commodities that do not have a guaranteed return profile.

How long have bonds been around?

Bonds have an interesting history dating back thousands of years; their first known use was in 2400 BC, during which bonds were used to raise funding to purchase grain. Later on in the 1100s, the government in Venice began to issue bonds to raise funding for wars and at this point, investors in bonds began to trade the instrument amongst each other.

In simple terms an initial investor in the

bond who needed urgent liquidity ahead of the maturity date would sell the instrument to another investor for immediate cash at an agreed discount. This was the beginning of the secondary market in which bonds could be openly traded that has continued into the present day.

What does the bond market look like now?

The global bond market is the largest securities market in the world with a total estimated size in the trillions of US dollars. Specifically in Africa, the largest bond markets are found in South Africa, Egypt and

Nigeria, each ranging in the tens of US dollars billions. Issuers of bonds (entities looking to raise money) range from governments who tend to be the largest players, to private and public companies, to financial institutions. Listed bond markets are accessible to investing institutions and individuals alike hunting for relatively stable returns. The traditional investment portfolio should typically be 30-40 percent fixed income, which is an asset class that would largely include bonds.

Why is the bond market important?

Economic growth is accelerated in economies that are best able to mobilise deposits and convert them into loan instruments (i.e bonds) to fund long term development projects in a win/win for both borrower and lender (investor). The banking sector is just one intermediary for this process; however, a sophisticated bond market provides a more investable and potentially sizable mechanism to fund economic growth. In fact, the research shows that there is a more direct impact on economic growth from the presence of bond markets than the presence of stock markets and just traditional banking institutions.

Why does this matter for Zimbabwe?

Despite Zimbabwe having one of the oldest stock exchanges in Africa, only three debt market instruments were listed on the local stock exchanges in the past decade namely the Econet Wireless Zimbabwe Linked Debentures, Rainbow Tourism Group Linked Debentures as well as the Getbucks Bond.

The activity of these instruments on the secondary market has been subdued as no single trade was recorded. The development of a secondary debt market has been impacted by our history of  hyper-inflation and currency volatility; the market has instead preferred to create private debt placements which limit publicly available information on debt as an asset class and therefore limits liquidity and access to it by excluding a broad base of investors and issuers.

The VFEX creates a unique opportunity for financial intermediaries to create listable US dollar debt instruments that are transparent, accessible, and tradable.

It is a pathway to creating hard currency funding to amplify economic growth in a country that is starved off capital; at the same time, it creates an alternative hard currency asset class for investors to consider in a country that has become a stock market and property market focused. The development of a listed bond market is a critical next step in the evolution of Zimbabwe’s capital markets.

 

Contact Details

IH Group

Telephone: +263 (24) 2745119/2745139/2745937

Email: [email protected]

 

Share This:

Sponsored Links