Front Matter Page

Research Department

Contents

• Summary

• I. Introduction

• II. Debt Securities Markets in the United States, Europe, and Japan

• III. Lessons from Government Securities Markets

  • A. Primary Markets

  • B. Secondary Markets

• IV. Lessons from Corporate Debt Securities Markets

  • A. Money Markets: A Prerequisite for Corporate Bon Markets

  • B. Regulatory Policies

  • C. Concentration of Market Power in the Financial Industry

  • D. Primary Market Infrastructure

  • E. Secondary Market Infrastructure

  • F. The Investor Base

• V. Concluding Remarks

• Annex I: Glossary of Financial Terms

• Tables

• 1. Selected Industrial Countries: Domestic Debt Securities by Nationality of Issuers

• 2. Selected Industrial Countries: International Debt Securities by Nationality of Issuers

• 3. Debt Securities Financing by Non-Financial Firms in Selected Industrial Countries

• 4. Debt Securities Financing by Non-Financial Firms in Selected Industrial Countries

• 5. Debt Securities of Non-Financial Corporate Sector Relative to Financial Sector: United States, Germany, and Japan

• 6. Bond Market Financing by U.S. Firms

• 7. The U.S. Commercial Paper Market

• 8. Non-Residents’ Holdings of Public Debt

• 9. Government Bond Markets: Germany vs. France

• 10. IOSCO Principles of Supervision and Regulation

• 11. Holders of U.S. Corporate and Yankee Bonds

• References

Summary

This paper identifies factors that contributed to the development and effectiveness of public and private debt securities markets in the advanced economies. Three conclusions on ways to minimize the cost of government debt securities are discussed. First, issuing debt at low cost is facilitated by tapping the pool of global capital. Second, cost minimization is facilitated by granting greater independence to debt management—in particular, greater independence from monetary and exchange rate policies. Third, minimizing the cost of debt is facilitated by reforming primary and secondary market infrastructures to appeal to institutional investors. In primary markets for government securities, these reforms have been reflected in the move away from issuing at fixed prices through syndicates, in favor of auctions with preannounced issue calendars and new issues concentrated in benchmark securities. In secondary markets, countries have introduced primary dealer systems to enhance price discovery and market liquidity. Money markets must be allowed to develop in order for secondary markets for government securities to function well.

Cross-country differences in the development of private debt markets are more apparent than for government securities markets. U.S. debt securities markets historically have financed a diverse cross-section of U.S. businesses; by contrast, European and Japanese domestic debt securities markets predominately have been used as a source of funding by financial institutions. The paper identifies factors that help explain why U.S. corporate debt markets flourished but markets in most other advanced economies have recently begun to develop: a well-functioning money market, the supervisory and regulatory system, market power in the financial industry, infrastructure in primary markets and in secondary markets, and the investor base. This list is not exhaustive, and the paper barely scratches the surface on the more fundamental determinants such as legal structures, cultures, and histories. Accordingly, the identified factors should be seen as necessary but not sufficient characteristics of effective securities markets.