How does the Eurobond market work?

The Eurobond market is said to be an Over-The-Counter (“OTC”) market. An OTC market is where participants exchange securities directly with each other without the involvement of a central exchange. Once a transaction is completed a buyer and seller exchange account details in order to deliver the cash to the seller and the bond to the seller. 

As a result, bond markets are a wide array of capital market participants aiming to business with each other. The role of providing order and direction is for the account of market-makers and electronic trading platforms who quote live pricing most of the times.  

In the African bond market though, indicative pricing (not live) is more common given the higher risk profile of the underlying securities.

What is meant with liquidity?

Financial markets love jargon. Something is said to be “liquid” when it flows easily. The same concept can be applied to Eurobonds when they “flow” smoothly, quickly and easily from a buyer to a seller. In other words, when a Eurobond can be bought or sold without constraints, the bond is said to be “liquid”. Constraint could be the lack of dept in the market where dealers are not willing to advertise buy and sell quotes. Another factor why a bond cannot be liquid could be the details of the bond itself. The total amount of the bond available may be too low or the bond may be issued with a very complex structure.

The higher the available volume of a bond in the secondary market (for more information Secondary Market: Issuance Process Section), the better the liquidity. Most government and corporate bonds qualify to be included into a benchmark index is the issue size if above a certain volume, further deepening it’s liquidity. A benchmark index can be used to track by funds or Exchange Trade Funds (“ETFs”) may actively buy and sell shares in an index.

Furthermore, the simpler the structure a bond the stronger the liquidity in that bond. For example, a simple plain vanilla, fixed coupon paying bond will usually attract a large investor audience than a complicated step-up coupon perpetual bond.

Finally, the better known and more seasoned (issued Eurobonds in the past) the issuer is, the more market participants will get attracted.

It must be stressed that liquidity is not a quantifiable term and therefore there is no fixed formula that dictates how weak or strong liquidity can be in a certain bond. The volume of the Eurobond, the number of market participants in that and the complexity of the bond are the main determinants to liquidity.

What are sell-side and buy-side market participants?

“Buy-side” market participants are said to be the end users or final holders of a Eurobond. End-users are predominantly investment funds, private banks or insurance companies.

Intermediaries such as market-makers or brokerage firms are generally referred to as “sell-side”.

What the difference between indicative and live/firm pricing?

A live price is a price that can be acted on. Live prices are mainly quoted by market-makers, electronic trading platforms and buy-side market participants.

In contrast, indicative pricing is either conditional or subject to a final call/decision. Intermediaries, such as brokerage firms acting on behalf of clients, typically quote indicative pricing only. Before a sale or purchase can be completed, a brokerage firm will need to revert to a client before agreeing a final price. Common abbreviations for Subject to Call (“STC”) or for Indicative (“Ind”) are often used next to prices presented by intermediaries. 

What are the trading hours for Eurobonds?

Because Eurobonds are not traded on an exchange with fixed opening hours, trading hours are subject to the working hours of your trading counterparties. Usually investors use 5PM GMT/BST as an indication.