Government bonds markets

Central banks and market practitioners use interest rates prevailing in the government bond market to extract certain information, the most important of which is implied forward rates. These are an estimate of the market s expectations about the future directirMi of short-term interest rates. They are important because they signify the market s expectafirMis about the future path of interest rates however, they are also used in derivative pricing and to create synthetic bond prices from the extent of credit spreads of corporate bonds. 

Bonds that have part or all of their cash flows linked to an inflation index form an important segment of several government bond markets. In the United Kingdom, the first index-linked bonds were issued in 1981 and at the end of 2012 they accounted for approximately 25% of outstanding nominal value in the gilt market. Index-linked bonds were also introduced in the United States Treasury market but are more established in Australia, Canada,... 

A common observation in government bond markets is that the longest dated bond trades expensive to the yield curve. It also exhibits other singular features that have been the subject of research, for example, by Pboa (1998), wbicb we review in this chapter. The main feature of long-bond yields is that they reflect a convexity effect. Analysts have attempted to explain the craivexity effects of long-bond yields in a number of ways. These are discussed first. We then consider the volatility and convexity bias that is observed in long-bond yields. 

Exhibit 1.8 shows the conventions (coupon frequency, Day count basis, and ex-dividend period) for the the government bond market of major European countries. 

Despite the appearance of many new fixed income assets, the government bond market continues to be, by far, the largest market in the Eurozone. In this chapter we analyse the recent trends in this market, its primary and secondary markets, and the key intracountry spread determinants. 

The Euro market has not only become the largest government bond market in size but also in number of issues. This market had in February 2003 over 250 liquid issues (over 1 billion outstanding and 1-year maturity), significantly more than the 108 issues in the Treasury market or the nearly 170 JGB issues. There are just around 25 liquid issues trading in the UK gilt market. 

EXHIBIT 5.4 Euro Government Bond Market Breakdown in Percentage Terms (2002)... 

EXHIBIT 5.5 Euro Government Bond Market Outstanding by Redemption Date ( million)... 

Government bond markets are closely related to other fixed income assets and interest rate and bond futures. This market is also increasingly related to the interest rate swap market. 

Securities issued by the government of the United Kingdom are known as gilts. The gilts market is the oldest government bond market in the world. In this chapter we present an overview of the gilts market, its structure, and institutions. 

Tbe Euro Government Bond Market Antonio Viiiarroya... 

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