Financial Sector Operations and Policy Financial Sector Development Indicators

Comprehensive assessment through enhanced information capacity

Contact: FSDI@worldbank.org

Financial Sector Indicators Note: 6

Part of a series illustrating how the Financial Sector Development Indicators (FSDI) project enhances the assessment of financial
sectors by expanding the measurement dimensions beyond size to cover access, efficiency and stability. Data on these dimensions,
as well as other information relevant for financial sector assessment, will become available online during Summer 2006.

Bond market development indicators

• Introducing the bond market indicators under the multidimensional indicator system
• Using multidimensional system to diagnose dimensions of bond markets in countries

Information incommensurate with growth
Bond financing, both international and domestic,
has become an integral and significant part of
countries’ and firms’ financing, especially for
emerging market economies. The size of the glo-
bal bond market has grown from $25 trillion in 1990
to $57 trillion in 2004, while that of emerging mar-
kets has increased from $1 trillion to $4 trillion.
International bond financing due to its market ori-
ented nature, being susceptible to short-run de-
velopments that affect prices, can be volatile.
Domestic bond markets are still less developed
in many countries. Therefore, information on this
form of financing is particularly important, espe-
cially for countries that are relatively new partici-
pants. Presently, information on emerging market
economies’ international bonds is more compre-
hensively captured and documented than that on
their domestic bond markets. This is partly because
the development of domestic bond markets in gen-
eral lags that of international markets, yet there is
a greater interest in monitoring on part of interna-
tional investors.
Overall, efforts on measuring bond market devel-
opment for a large cross-section of countries other
than high income ones, remain limited. The FSDI
project, as part of its objective to assess compre-
hensively financial systems, introduces indicators
for monitoring bond markets as per the four di-
mensions of the financial system—size, access,
efficiency and stability (refer to FSDI dossier for
information on the concept and framework utilized).
Information organized per these dimensions helps

Bond market indicators in FSDI

Size
Ratio of private sector bonds to GDP
Ratio of public sector bonds to GDP
Ratio of international bonds to GDP
Dummy variable: Existence of bond market
Dummy variable: Existence of corporate bond market
Access
Government bond yields (3 months and 10 years)
Ratio of domestic to total debt securities
Ratio of private to total debt securities (domestic)
Ratio of new corporate bond issues to GDP
New corporate bond issued ($ billion)
Efficiency
Quoted bid-ask spreads (10-yr government bond yield)
Turnover of private sector bond on securities exchange
Turnover of public sector bond on securities exchange
Settlement Efficiency Index
Stability
Volatility of sovereign bond index
Skewness of sovereign bond index
Ratio of short-term to total bonds (domestic)
Ratio of short-term bond to total bonds (international)
Correlation with German bond returns
Correlation with US bond returns
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 Financial Sector Operations and Policy
understand better the relative development of bond
markets around the world, as well as the strengths
and weaknesses of each dimension.
Size
The size dimension comprises the most commonly
used measures of bond markets, notwithstanding
that the other three dimensions can be equally im-
portant. Ideally, FSDI would like to record compre-
hensively the size of bond markets globally. How-
ever, given the limited amount and reliability of data
from many developing countries, this goal cannot
be met. Nonetheless, as a first step, utilizing docu-
ments, statistical handbooks, websites and corre-
spondence with individual securities exchanges
around the world, a map (below) depicting the trad-
ing of bonds (public and corporate) has been put
together.
For the measure of size, public, private and inter-
national bonds are included. This section discusses
first the indicators of the size of bond markets and
then briefly comments on the determinants.
Documenting the existence of bond markets worldwide
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org
More than 130 countries have some bond securities traded
on exchanges. These countries cover nearly 77% of the
world’s gross domestic product (measured at purchas-
ing power parity term) and 91% of world’s population.
Public sector bond markets
Based on the World Bank’s Financial Structure
Database, FSDI utilizes the basic measure of pub-
lic bond market size, namely, the ratio of public
sector bonds to GDP. This measure is avail-
able for most countries since 1990.
The public sector bond market size varies across
regions and income groups. In terms of both ab-
solute and relative (to GDP) terms, North America
leads the rest of the world, with the largest bond
market, followed by Europe, where in some indi-
vidual countries public bond markets are more
developed than in the U.S. Asia outperforms Latin
America, for which the relative measure (as a ratio
of GDP) is the smallest among all developing re-
gions (left graph, next page). High income OECD
countries have substantially larger bond markets,
while the relative size of bond markets in middle
page 2
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

Ratio of public sector bond to GDP, by region Ratio of public sector bond to GDP, by income
Percent Percent
55% 50%
North America
High Income:OECD

40%
45% Europe & Central Asia
Low Income

Sub Saharan Africa 30%

35% South Asia
Upper Middle Income
20%

25% East Asia & Pacific

Lower Middle Income
10%
Latin America & Caribbean High Income: Other

15% 0%
2000 2001 2002 2003 93 95 97 99 01 03

income countries is generally indistinguishable groups. The change in the ranking of income
from the one in low income countries, even though groups compared with public sector bonds is no-
the difference may be significant in absolute terms. ticeable.

Private sector bond markets International bond issues

FSDI documents global trading of corporate
bonds, which is also depicted in the world map. A
total of 104 countries, covering 75% of world GDP
and 85% of world population, have corporate bonds
traded on securities exchanges. As a measure of
private sector bond issues, the ratio of private
sector bond to GDP is available since 1990. The
graph below shows the relative distribution of pri-
vate sector bonds to GDP for different income
International bonds in part reflect a country’s abil-
ity to raise capital globally, and in FSDI this is mea-
sured by the ratio of international bonds to GDP.
Developing countries, because of limitations in the
management of their fiscal and exchange rate poli-
cies, have difficulty utilizing international markets,
although there has been significant progress in
their cross-border bond issuance since the mid-
1990s. Almost 96% of the international debt secu-

Ratio of private sector bond to GDP, by income

Ranking by ratio of Int'l. bonds to GDP (%)
Percent
50% High Low
High Income:OECD Lebanon Saudi Arabia
40% Liberia Pakistan
Iceland India
30%
Netherlands China
High Income: Other
20% Ireland Iran
Upper Middle Income

10%
Lower Middle Income
Low Income
0%
2000 2001 2002 2003

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 Financial Sector Operations and Policy
rities outstanding are accounted for by high-income
countries. Most developing countries, e.g., Paki-
stan, Iran etc., have low international bond to GDP
ratios. However, some developing countries, like
Lebanon and Liberia, have a high international
bond to GDP ratio (table, previous page).
Determinants of bond market size
The size of a country plays an important role in
determining whether it operates a securities ex-
change (Clayton, Jorgensen, and Kavajecz, 2006).
A literature survey suggests that this is also appli-
cable to bond markets. Countries with less devel-
oped or non-existent domestic bond markets are
in general small countries. And countries with small
financial markets tend to have small bond mar-
kets. The correlation coefficient between the ra-
tios of international bond to GDP and private credit
to GDP has a value of 35%. However, small coun-
tries can overcome the size constraint and de-
velop bond markets by issuing bonds in foreign
countries and foreign currencies, or by developing
common securities exchanges and spreading the
infrastructure costs among members.
The size of the bond market, measured by private
sector bond to GDP ratio is positively correlated
with the size of the banking sector (left graph, be-
Banking sector and bond market development
Ratio of private sector bonds to GDP (%)
120%
100%
80%
Netherlands
Italy
60%
40%
Argentina
20%
0%
5 105
Ratio of private credit to GDP (%)
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org
low). Academic literature, such as Claessens,
Klingebiel, and Schmukler (2003) and Burger and
Warnock (2005), show that the main determinant
of the size of the bond market is the protection of
creditor rights in a country. Creditors are willing to
purchase arm’s length securities’ products such
as corporate bonds, only when they are convinced
that their claims will be repaid without too much
difficulty. The graph (below, right) illustrates the
positive correlation between countries’ institutional
framework, which incorporates creditor rights, and
the ratio of private sector bonds to GDP.
Access
Access, especially with regard to domestic mar-
ket is useful and effective only when the cost of
capital is low and the process of obtaining capital
for the domestic private sector is relatively easy.
Cost of capital: As a proxy measure of the cost of
capital, data on 3-month and 10-year govern-
ment bond yields are collected utilizing informa-
tion from the World Federation of Exchanges
(WFE).
Ease of access: To measure access, two indica-
tors are created based on data from the Bank for
International Settlements:
Creditor protection and bond market development
Ratio of private sector bonds to GDP (%)
120%
Denmark
100%
80%
60% France
40% Australia
Switzerland
20% Peru
0%
205 1 3 5 7 9
Creditor Rights Index
page 4
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

(i) Ratio of domestic bonds to total bonds out- Value of new corporate bonds to GDP, 2004
Percent
standing. This reflects the capacity of local mar-
22
kets to provide capital for issuers. It is assumed
that in order to reduce currency mismatch, an is-
17
suer would prefer raising capital domestically than
internationally, unless the domestic market is un-
derdeveloped. 12

(ii) Ratio of private sector bonds to total do- 7

mestic bonds outstanding. This indicator helps
measure the convenience of obtaining capital for 2
the domestic private sector. The composition of a High High Low Lower Upper
income: income: income middle middle
country’s outstanding debt securities also reflects
OECD Other income income
the ease of access to capital for private borrow-
ers. This information is important from the per-
spective of borrowers, and the private sector in
particular, as it makes apparent the degree of ac-
cessibility and thus affects financing decisions.

Using Thomson Financial as a source, data on

the local corporate bond market’s absolute capac-
ity to raise new capital are collected. This offers a
flow measure of access to bond markets. Both
the number and value of new corporate bond
issues in domestic markets are available in FSDI
annually for 2001-2005 for an exhaustive list of
countries around the world. The data show that
corporations in high-income OECD countries ac-
count for nearly 90% of the corporate bond issues
globally. Corporate bond issues in developing
countries are still small by global standards, as
well as incommensurate with their rising share of
production in the world economy.

Value of new corporate bonds issues, 2004

Private sector information
Information on private sector participants in bond markets 2%
is important from the following perspective: 4%
• For the bond market to play an effective role in the growth 3% High income: OECD
2%
of business, it has to be able to facilitate financing for
both the corporate sector and the government. High income: Other
• It reflects systematic progress in creditor protection, le-
gal infrastructure etc., in a country, as the development 89%
of corporate bond markets requires more systematic Upper middle income
progress than does the development of government bond
markets (Claessens et al, 2005). Lower middle income
• It reflects facilitation of private credit. Heavy issuance of
bonds by the government, coupled with regulations forc- Low income
ing banks to purchase and hold such securities, can
result in financial repressions and crowding out of the
private sector.

page 5
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

Efficiency • In European countries that have adopted the

Efficiency of bond markets is as important as their Euro as their currency, bid-ask spreads on bond
size. More than 130 countries operate some form yields are lower than one basis point, while in
of organized bond market, but only about 50 have other countries with similar fundamentals, e.g.,
become substantial in size, and an even smaller Sweden, traders have to pay substantially higher
number are efficient by international standards. spreads.
• The bid-ask spreads on government securities
To measure the efficiency of bond markets, FSDI of Asian emerging economies in general are be-
focuses on the liquidity of markets as reflected by tween 6-10 basis points and much below those
the tightness of the quoted bid-ask spread and for Latin American countries.
the turnover ratio. Substantial and adequate li-
quidity enables markets to fulfill their roles in di-
versifying risks, monitoring issuers, and allocat-
ing resources for more productive purposes.
Ranking of Countries by Bid-Ask Spreads
Quoted bid-ask spreads on government bond Tight Spread Wide Spread
yields (as of March 2006) are obtained for a large USA Vietnam
cross-section of countries from major market- Austria Peru
makers of sovereign bonds in developed and Germany Qatar
emerging markets. The following patterns are re- Belgium Dominican Republic
vealed:
France Pakistan

Quoted bid-ask spread worldwide (10-yr government bond yield; basis points)

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 Financial Sector Operations and Policy
The data on turnover ratio (from WFE) for both
private and public sector bonds traded on sec-
ondary markets is another efficiency indicator.
However, these numbers do not include the many
trades that settle outside the stock exchanges
between, for example, financial institutions and
over the counter markets.
Stability
Lack of stability in bond markets can contribute to
a higher cost of capital and discourage investors
from entering the markets. For example, high vola-
tility in the price of benchmark government bonds
hampers the development of yield curves and the
adequate pricing of corporate bonds. Due to pau-
city of high frequency data on corporate bonds,
FSDI primarily focuses on government bonds.
Daily return index of sovereign bonds are collected
from both Datastream (for developed economies)
and Citibank (for mainly emerging markets). Based
on the daily return indices, volatility (annualized
standard deviation), skewness, maturity struc-
Skewness of government bond returns
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org
ture and correlation between bond returns are
analyzed.
Volatility: This is the commonly used measure of
stability. Analysis highlights that volatility in select
developing countries is below that in developed
markets. This maybe the outcome of (i) trading of
bonds being less active in developing countries,
and in many instances prices remain unchanged
for several weeks; and (ii) interest rate regulation
in some markets sometimes distorts the true cost
of capital. As such, underestimation of instability
in developing countries remains a distinct possi-
bility.
Skewness: This indicator gauges the probability
of large negative losses associated with countries’
sovereign bonds. Losses concern investors more
than large surges of bond prices. As shown in the
map (below), bond returns in developed markets
in general exhibit less negative skewness, i.e., they
are less likely to deliver large negative returns than
those in developing countries.
page 7
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

Short-term bond to total bond ratio (%) Correlation with US and Euro Bond Returns
Argentina 5.4 US Euro
Australia 45.0 Canada 0.85 0.09
France 31.4 Chile 0.91 0.09
Germany 31.3 China 0.82 0.11
India 7.7 Mexico 0.64 0.18
Indonesia 13.7 Netherlands 0.58 0.43
United Kingdom 40.7 United Kingdom 0.58 0.42
United States 21.7

Maturity: A large share of short-term securities in Dimensions complimentary

total securities debt is an important sign for insta-
bility and risk, as it heightens vulnerability to sud-
den outflows of capital, or surges of short-term
interest rate that can increase the burden of debt
service.
Correlation: This refers to the correlation of a
country’s bond returns with returns on U.S. or
German (Euro) bonds. Lower correlation indicates
higher diversification and therefore less cross-
border synchronicity. The table above (right)
shows that geographic proximity with the U.S. (and
vice-versa Germany) results in higher correlation.
Overall, the four dimensions of bond market de-
velopment are positively correlated. Larger bond
markets are more efficient and provide easier ac-
cess to lower cost domestic capital. This rein-
forces previous findings, such as those in
McCauley and Remolona (2000), which suggest
that a critical size of around $100-$200 billion is
required to support a liquid market. Further, coun-
tries that do well in size are also more stable.
Smaller markets are more volatile and closely cor-
related with major developed markets, and in ad-
dition the maturity structure of their debt is shorter.
The table on page 10 presents the composite bond

Composite Indicators
FSDI provides composite indicators for the dimen-
sions of the bond market (size, access, efficiency Composite Bond Market Indicators
and stability), as well as for their overall develop- Size
ment. These composite indicators have been con-
structed using the standardized methodology uti- USA
lized in the FSDI framework.
Brazil

Creating composite indicators Stability Access

The composite indicator for each of the various four
dimension of capital markets is comprised of sub-
indicators. These sub-indicators are standardized by
subtracting the median of the distribution and scaled by India
the standard deviation of the distribution. These
standardized scores are then averaged to create the
composite indicator for each dimension. Efficiency

page 8
 Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

market indicators for the multidimensional system Correlation matrix for composite indicators
and the correlation between the four dimensions. Size Access Efficiency Stability
Size 1.00
As an example of benchmarking all four dimen- Access 0.40* 1.00
sions, a comparison of Brazil, India and the U.S. Efficiency 0.46* 0.40* 1.00
is presented in the radar chart (previous page). Stability 0.05 0.09 -0.02 1.00
The U.S. has the most developed bond market * indicates significance at the 5% level
among the three countries, while India’s bond
market is more stable than Brazil’s even though
the latter has a larger bond market compared with
the former.

The four-dimension analytical capacity provided

by FSDI serves as a powerful mechanism for iden-
tifying strengths and weaknesses in bond mar-
kets and can be utilized effectively for the purposes
of policy formulation and reforms.

Select References
Burger, John D., and Francis E. Warnock, 2005, “Foreign
participation in local-currency bond markets,” Working
Paper.
Clayton, Matthew J., Bjorn N. Jorgensen and Kenneth A.
Kavajecz, 2005, “On the presence and market-structure of
exchanges around the world,” Journal of Financial Mar-
kets, Vol.9(1): 27-48.
Claessens, Stijn, Daniel A. Klingebiel, Sergio L. Schmukler,
2005, “Government Bonds in Domestic and Foreign Cur-
rency: The Role of Institutional Factors,” Review of Inter-
national Economics.
McCauley, Robert and Eli Remolona, “Size and Liquidity of
Government Bond Markets”, BIS Quarterly Review, Novem-
ber 2000.

Data Sources
Bloomberg
Bank of International Settlements (BIS)
Datastream
Financial Structure Database, The World Bank
Thomson Financial
World Federation of Exchanges (WFE)

page 9
Financial Sector Operations and Policy Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: FSDI@worldbank.org

Bond Market Composite Indicators and Ranking

Country Size Efficiency Access Stabilty Overall
DNK 7.92 8.33 6.46 3.96 6.67
JPN 8.76 5.99 5.98 5.04 6.44
USA 7.54 6.06 6.43 5.26 6.32
ISL 9.92 5.00 5.00 5.00 6.23
SWE 6.07 9.30 5.52 3.65 6.13
NLD 8.08 6.13 4.84 4.38 5.86
ITA 7.49 6.10 5.39 4.34 5.83
AUT 6.06 6.00 4.94 6.12 5.78
BEL 7.59 6.13 5.33 3.93 5.75
FRA 6.54 6.13 5.33 4.59 5.65
DEU 6.13 6.16 5.12 5.07 5.62
GRC 6.89 6.04 4.43 5.00 5.59
ESP 5.87 6.01 5.44 4.76 5.52
KOR 5.29 5.33 6.15 5.00 5.44
PRT 6.02 6.10 5.28 4.05 5.36
CHE 5.19 5.15 6.58 4.42 5.34
CAN 5.87 6.06 5.00 4.38 5.33
COL 4.36 7.41 4.03 4.70 5.12
POL 4.49 5.87 3.76 6.09 5.05
SGP 5.32 5.40 5.10 4.22 5.01
SVK 4.32 5.70 5.00 5.00 5.01
FIN 5.57 6.10 4.75 3.60 5.00
GBR 5.37 7.24 3.82 3.55 5.00
IRL 6.40 6.31 4.36 2.91 4.99
MYS 5.86 4.13 5.70 4.28 4.99
NOR 4.71 5.88 5.20 4.07 4.96
AUS 5.10 5.92 5.09 3.66 4.94
CZE 5.18 4.51 5.00 5.00 4.92
THA 4.45 4.51 5.53 5.00 4.87
HKG 4.33 4.71 5.19 5.00 4.81
CHL 4.68 4.08 5.55 4.82 4.78
ZAF 4.67 3.77 4.22 5.53 4.55
IND 4.35 4.53 4.26 5.00 4.54
ARG 4.35 4.99 3.54 5.00 4.47
RUS 3.48 4.69 5.00 4.55 4.43
NZL 4.30 5.00 5.00 3.15 4.36
HUN 5.01 3.12 3.52 5.38 4.26
IDN 4.10 3.47 4.61 4.26 4.11
MEX 4.17 4.14 3.09 4.47 3.97
TUR 5.09 4.16 3.20 3.35 3.95
PAK 4.39 1.94 5.00 4.07 3.85
BRA 5.16 3.12 3.10 2.83 3.55
PHL 4.57 2.79 2.18 4.57 3.53
PER 3.66 2.55 4.49 3.27 3.49

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