IDEAS home Printed from
   My bibliography  Save this book

The changing shape of fixed income markets: a collection of studies by central bank economists


  • Bank for International Settlements


The papers in this volume analyse recent changes in the world's major fixed income markets. The introduction of the euro, structural changes in governments' fiscal positions, traumatic events such as the global financial market crisis of 1998, and advances in the technology of trading platforms are reshaping fixed income markets in Europe, Japan and the United States. The first paper provides a broad overview of the changes under way, and the following four papers elaborate on some of the issues that emerge. These papers complement a report published by the Committee on the Global Financial System in March 2001 on the use of collateral in wholesale financial markets. Taken together, the papers in this volume highlight the growing importance of private sector debt instruments. Falling supply and shifts in the mix of investors holding government securities are draining liquidity from some government securities markets, in particular the US Treasury and UK gilt markets. In contrast, non-government markets have seen issuance volumes soar, a greater diversity of instruments made available, and liquidity conditions improve at least for the largest bond issues. The paper by Mastroeni describes the development of one of the fastest growing segments of non-government securities market: Pfandbrief-style products in the euro market. Investors have accommodated changes in the relative borrowing patterns of the government and non-government sectors by moving towards more diversified portfolios. A key challenge faced by portfolio managers is pricing and managing the credit risk that they thereby take on. The paper by Hattori, Koyama and Yonetani examines the pricing of credit risk in the yen corporate bond market. They find that default risk, the stability of the financial system and the level of new corporate bond issuance relative to government bond issuance are the most important determinants of credit spreads in Japan. Demand for fixed income instruments in recent years has also been affected by changes in hedging and arbitrage activity. The 1998 crisis led to a reassessment of risk management practices, one outcome of which was a switch away from the exclusive use of government bonds as hedging vehicles in favour of a wider array of instruments. Other traumatic events, such as squeezes in German government bond futures contracts, reinforced this search for alternative hedging vehicles. Schulte and Violi examine interactions between cash and derivatives markets in the euro area, and assess ways to alleviate the risk of a shortage in the cheapest bond to deliver into a futures contract. Each market participant who switches to using non-government instruments as hedges subtracts liquidity from the government market and adds it to other markets, in the process raising the incentive for other market participants to follow suit. As non-government instruments gain liquidity, they are increasingly being used to price and hedge other securities and perform other functions for which government securities tended to be used in the past. The paper by Cooper and Scholtes concludes that declining supplies of government paper have helped to depress US Treasury and UK gilt yields below risk-free interest rates and so diminished their usefulness as benchmarks. They then demonstrate that interest rate swaps appear to have become the de facto benchmark for pricing high-quality bonds.

Suggested Citation

  • Bank for International Settlements, 2001. "The changing shape of fixed income markets: a collection of studies by central bank economists," BIS Papers, Bank for International Settlements, number 05, November.
  • Handle: RePEc:bis:bisbps:05

    Download full text from publisher

    File URL:
    File Function: Full PDF document
    Download Restriction: no

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Michael J. Fleming, 2000. "The benchmark U.S. Treasury market: recent performance and possible alternatives," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 129-145.
    2. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Endo, Tadashi, 2008. "Broadening the offering choice of corporate bonds in emerging markets : cost-effective access to debt capital," Policy Research Working Paper Series 4655, The World Bank.
    2. Marvin Barth & Eli Remolona & Philip Wooldridge, 2002. "Changes in market functioning and central bank policy: an overview of the issues," BIS Papers chapters,in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 1-24 Bank for International Settlements.

    More about this item

    Book Chapters

    The following chapters of this book are listed in IDEAS


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:bisbps:05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.