Trading and Capital-Markets Activities Manual
Profiles: Irish Government Bonds
Irish government bonds (IGBs) are issued by the National Treasury Management Agency (NTMA), which is responsible for the management of Ireland's national debt. Bonds are issued to fund the government's borrowing requirements and to fund maEagle Tradersg bond issues.
CHARACTERISTICS AND FEATURES
Bonds are issued in maturities of five, 10, and 20 years. Issues are transferable in any amount and are listed and traded on the Irish stock exchange. Fixed-rate bonds issued before 1993 pay interest semi-annually, while bonds issued since then pay interest annually. Coupons on variable-rate bonds are paid quarterly. Interest is accrued from the coupon payment date to the settlement date, and bonds go ex-dividend on the Wednesday nearest to three weeks before the coupon is paid. Interest is computed using the actual/365 day-count convention on semi-annual coupon bonds and using the 30/365 day-count convention on annual coupon bonds. Settlement is done the day after the trade date (T+1) domestically and three days after the trade date (T+3) internationally. IGBs are available in registered form and are cleared through the Central Bank of Ireland Securities Settlement System (CBISS).
Irish government bonds and notes are used for investment, hedging, and speculative purposes, by both domestic (Irish) and foreign investors and traders. U.S. banks purchase Irish government bonds to diversify their portfolios, speculate on currency and Irish interest rates, and hedge Irish-denominated currency positions and positions along the Irish yield curve.
DESCRIPTION OF MARKETPLACE
About 80 percent of issuance is by the tap system, and the rest of the bonds are issued by regular auctions. Taps are sales of a fixed amount of securities at a fixed price when market conditions are considered favorable. The type of bond and size of the tap issue are communicated to the market, but the price is only communicated to the primary dealers who bid by telephone. The auction system has both a competitive and non-competitive element. The competitive auction is open to all investors who may bid directly or via a primary dealer or stockbroker. Following the auction, non-competitive bids are filled at the average auction price. Only primary dealers may submit non-competitive bids.
IGBs are listed on the Dublin, Cork, and London Stock Exchanges. They are also traded in the over-the-counter (OTC) market.
Six primary dealers quote firm bid and offer prices in each of a specified list of eight bonds. In return for their market-making services, the NTMA provides these dealers with exclusive access to the supply of bonds issued in tap form. The designated brokers are CS First Boston, UBS Ltd., Davy, Goodbody, NCB, and Riada.
The principal holders of IGBs are domestic (Irish) and foreign institutional investors, such as banks, securities firms, insurance companies, pension funds, and money managers.
Price transparency is relatively high for Irish government securities as a result of the structure of the primary dealer system, which enhances liquidity. Several information vendors disseminate prices to the investing public.
Bonds are quoted as a percent of par to two decimal places. The price paid by the buyer does not include accrued interest. The bid/offer spread ranges from .05 to .20 basis points, depending on the liquidity of the issue.
Interest-rate risk may be hedged by taking contra positions in government securities or by using swaps or futures. Foreign-exchange risk can be hedged by using currency swaps, futures, or forward rate agreements.
Active portfolio management, the wide range of coupons and maturities available, and the development of a trading, rather than a purely investment outlook, among Irish investors has increased the liquidity of the Irish government bond market. The large issues tend to be very liquid throughout the yield curve, particularly the eight bonds in which the primary dealers are obliged to make markets.
IGBs are exposed to interest-rate risk as a result of the inverse relationship between bond prices and interest rates. Longer-term issues have more price volatility than short-term instruments.
Currency fluctuations may affect the bond's yield as well as the value of coupons and principal paid in U.S. dollars.
A change in the political environment, withholding tax laws, or market regulation can have an adverse impact on the value and liquidity of an investment in foreign bonds. Investors should be familiar with the local laws and regulations governing foreign bond issuance, trading, transactions, and authorized counterparties.
The accounting treatment for investments in foreign debt is determined by the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, ''Accounting for Certain Investments in Debt and Equity Securities,'' as amended by SFAS 125, ''Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.'' SFAS 125 has been replaced by SFAS 140, which has the same title. Accounting treatment for derivatives used as investments or for hedging purposes is determined by SFAS 133, ''Accounting for Derivatives and Hedging Activities.'' (See section 2120.1, ''Accounting,'' for further discussion.)
RISK-BASED CAPITAL WEIGHTING
Irish government bonds are assigned to the 0 percent risk weight category.
LEGAL LIMITATIONS FOR BANK INVESTMENT
Irish government bonds are type III securities. As such, a bank's investment in them is limited to 10 percent of its equity capital and reserves.
Crossan, Ruth, and Mark Johnson, ed.
The Guide to International Capital Markets 1991. London: Euromoney Publications
PLC, pp. 37-49, 1991.
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