## 1. Maintain a sound macroeconomic environment. Our study highlights that local currency bond ## Source details **Canonical URL:** [1. Maintain a sound macroeconomic environment. Our study highlights that local currency bond](https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021283-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2021/english/wpiea2021283-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2021/english/wpiea2021283-print-pdf.pdf.json) --- ### Macroeconomic findings and recommendations - Local currency bond yields are very sensitive to fiscal fundamentals. - Anchor investors’ expectations in moderate fiscal deficits and sustainable debt levels to reduce domestic financing costs and alleviate interest payment burdens. - Increase potential growth to: strengthen tax revenues; improve debt dynamics; reduce overall debt vulnerabilities and country risk premia. ### Empirical notes - To address potential endogeneity between sovereign bond yields and LCBM indicators the authors re-estimated equation (1) using lagged values for the latter; the coefficients and significance remained broadly unchanged relative to the base specification with contemporaneous values for the LCBM indicators. (footnote 13) - Interaction effects are calculated using estimated coefficients and the difference between the best 75th and worst 25th percentile for each LCBM development indicator, in the event of a 10-point increase in the VIX. (footnote 14) ### Policy recommendations (summarized) - Maintain macroeconomic stability through prudent fiscal policy and policies that raise potential growth to lower sovereign financing costs. --- ### 2. Modernize the legal and regulatory framework for debt markets. ### Key reforms recommended - Allow for greater debt management flexibility and promote the trading and holding of securities. - Tax policy: taxes should not be levied solely on the holders of the coupon. - Eliminate mandatory trading through brokerage houses to reduce transaction costs and increase secondary market activity. --- ### 3. Improve market infrastructure to minimize costs and risks for participants. ### Recommended actions - Promote a sound custodian and settlement infrastructure. - Develop market makers and primary dealers to reduce the costs and risks of holding securities and settling transactions. --- ### 4. Diversify the investor base to promote stable funding and flexible debt management. ### Findings and policy guidance - Expanding investor bases beyond banks and public entities to include private pension funds has shown encouraging experiences in the Dominican Republic, Costa Rica, and Honduras. - Facilitate the formation of fully funded pension systems on individual capital accounts and ensure the tax system does not penalize this type of investment. - Stimulate foreign investor participation through transparent and market-friendly debt management practices, efficient market infrastructure, and fair taxation. - Caution: a large share of certain investor types (notably foreign participation) could increase market volatility; April 2020 GFSR Chapter 3 found financial market depth increases volatility when foreign participation rises beyond a 40 percent threshold. (footnote 15) --- ### 5. Improve coordination between debt management and monetary policy. ### Recommended institutional arrangements - Ministry of Finance should be the sole issuer of securities to avoid market fragmentation. - Central banks could gradually implement monetary policy relying on government securities; this often requires strengthening the central bank’s balance sheet and operational autonomy. - Potential measures include: - Instituting regular transfers of profits/losses from/to the central bank and, where warranted, recapitalizing the central bank with marketable securities. - Establishing mechanisms for the timely provision of government securities for the central bank to execute monetary policy. --- ### 6. Improve primary market debt management practices. ### Priority actions - Expand issuance of benchmark securities at various maturities to create a well-defined yield curve and enhance monetary transmission. - Publish and widely disseminate more strategic Medium-Term Debt Management Strategies (MTDS) that define funding actions for at least one year ahead. - Make auction practices more regular, transparent, and predictable: - Publish an auction calendar for each instrument with predefined auction dates, preferably at regular intervals, regardless of specific funding needs. - Gradually clear auctions at market prices. --- ### B. Developing LCBM in CADR: Sequencing and Lessons from International Experience ### Overall assessment - The CADR region as a whole is in early stages of market development across the six LCBM building blocks, with exceptions for particular countries. ### Recommended sequencing - Prioritize improvements in the primary market: - Publication of updated MTDS. - Increase auction transparency, regularity, and predictability. - Enhance the legal framework and market infrastructure to enable primary and money markets. - As primary and money markets become more effective, focus on: - Enlarging the investor base. - Deepening the secondary market. - Enhancing yield curve formation. - Adjust regulatory frameworks to facilitate creation of collective investment schemes (e.g. private pension funds and mutual funds) and allow for more flexible debt management operations. ### International peer lessons by domain - Debt management and monetary policy coordination: - Mexico: Banco de Mexico allowed to purchase federal government securities for monetary regulation by organic law; a government cash deposit is created at the central bank of the same size, terms, and yield as the securities sold. - Debt management flexibility: - Brazil: legal framework empowers the Head of the debt management office to issue debt and conduct liability management operations at prices below, above, or at par; high transparency and accountability. - Investor relations: - Dominican Republic: 2016−20 MTDS (approved by Parliament and published in 2016) establishes strategic objectives for the debt portfolio and an issuance policy for benchmark instruments; annual borrowing plans with specific target ranges and pre-announced auction calendars. - Efficiency in the tax framework: - Georgia: implemented a competitive tax framework across key classes of investors in primary and secondary bond markets; reforms created uniform tax treatment across primary and secondary markets and aligned tax treatment for institutional investors such as mutual and investment funds. ### Regional initiatives led by CABEI - Creation of a Regional Trading Platform offering clearing, settlements, and custody services to enhance market infrastructure, facilitate cross-border operations, diversify investor base, and increase bond market liquidity. - Creation of a Regional Investment Fund allowing CABEI and extra-regional partners to invest in CADR domestic debt. - Upgrading sovereigns’ credit ratings through CABEI’s partial credit guarantee to enhance credit ratings and access favorable terms to the Mexican market. --- ### Annex I. The LCBM Framework ### Framework structure and methodology - Uses indicators representing key functionalities of each building block; indicators assessed from stage 1 to stage 4. - Indicators ordered sequentially from foundational to sophisticated measures. - Two types of indicators: - Outcome indicators: show the condition of the building block. - Policy indicators: demonstrate current practices by authorities. - Most indicators use binary (yes or no) questions; countries rated 1 (yes) or 0 (no); sum determines indicator stage. - Composite stage at the building block level: - For money market, primary market, secondary market, and investor base: equal weighing of the simple average of assigned stages of outcome and policy indicators. - For market infrastructure and legal and regulatory framework: composite stage is the simple average of assigned stages of policy indicators. ### Four stages of LCBM development (threshold methodology) - Stage 1, or nascent stage: relevant indicator exhibits no functionality. - Stage 2, or developing stage: indicator exhibits some functionality, but severe shortcomings exist. - Stage 3, or emerging stage: basic elements of the indicator’s functionality are established. - Stage 4, or mature stage: indicator exhibits a considerable degree of functionality; broadly corresponds to levels/functionality in LCBMs of advanced economies. - For the investor base building block, stage 4 represents functionalities observed in emerging market economies at a more advanced stage of market development. --- ### Annex II. Status of LCBM Development in CADR ### Costa Rica - Investor Base - Non-bank financial institutions (mainly private pension funds, insurance companies, and investment funds) participate around 45 percent and are the main holders of central government debt. - State-owned banks, the social security fund, and other public institutions hold about 8, 17 and 10 percent of the total, respectively. - Private banks’ participation remains low. - Money Market - As of end-2019, BCCR liabilities and government debt amounted to 5 percent of GDP and 45.7 percent of GDP, respectively. - BCCR extensive issuance reflects partly its negative net worth of about 6½ percent of GDP (as of December 2019). - BCCR acts more as a debt than as a liquidity manager. - Money market turnover remained low, at 1.9 percent of the total stock of securities. - Primary Market - Price formation weak because large short-term funding needs impaired competitive processes. - Direct placements (Tesoro Directo) and non-marketable issuances accounted for the majority of financing. - Ongoing efforts: phase out open bond windows and bilateral bond sales; reform bond auction mechanisms so the Treasury becomes a price-taker. - Secondary Market - Relatively illiquid and trades mostly public debt instruments; benchmark prices difficult to identify. - Monthly turnover ratio 6 percent as of 2019. - Secondary market trading handled by the BNV’s securities brokers through a multilateral BNV trading system mandatory for all fixed-income securities transactions. - Additional institutional note - There have been plans for BCCR to issue securities with maturities up to 3 years, leaving the longer segment to the government; in practice the government has also issued shorter-term instruments to meet cash and debt management needs. ### Dominican Republic - Investor Base - As of end-2019, government debt primarily owned by pension funds’ associations (AFPs), representing over a third of the investor base. - Banks and foreign investors hold about 15 and 10 percent, respectively. - The public sector accounts for about 25 percent of total holdings, most of which are central bank recapitalization bonds. - Money Market - The stock of securities issued by the central bank (BCDR) was almost equivalent (ratio of 0.99) to the outstanding amount of domestic debt issued by the central government. - As of 2019, BCDR liabilities and government debt amounted to 13 percent of GDP, respectively. - The relatively large share of central bank securities originates from the quasi-fiscal operations of 2003-2004, where BCDR issued instruments to deal with a banking crisis. - Absence of a predictable auction calendar prevents further deepening of the domestic debt market. - Primary Market - Public debt management operates within a clear and transparent framework, but greater coordination between the Ministry of Finance and the BCRD would enhance predictability. - Price formation hindered by market fragmentation and competing issuers. - Uncertainty about amounts distributed over competitive and non-competitive auction processes has generated yield volatility. - Secondary Market - Trading remains relatively low but volumes have steadily grown during the last decade. - Market-makers program launched in 2012 increased trading volumes and transparency, reducing bid-ask spreads. - Most transactions are operated bilaterally or over the counter (OTC). ### El Salvador - Investor Base - Domestic investor base largely comprises pension funds and commercial banks. - Pension funds represent about 80 percent of total holdings, mainly in the form of Certificates of Pension Investments—pension liabilities of the government. - Commercial banks’ participation in the local investor base is low at around 10 percent, investing mostly in short-dated maturities. - Money Market - The Ministry of Finance is the main securities issuer; the central bank (BCR) intervenes through small and irregular auctions. - Repo market more liquid than the interbank market. - Money market turnover remained low, at around 2 percent of the outstanding stock of securities, amidst structural excess liquidity. - Primary Market - Primary issuance concentrated on Treasury Bills (LETES) and occasionally on Treasury Certificates (CETES). - Domestic yield curve does not extend beyond one year. - Issuance calendars and indicative amounts are published, though auctions often deviate from plans, affecting investor liquidity and strategies. - Current funding strategy exposes the government to refinancing risks. - Secondary Market - Very small; monthly turnover ratio just 0.2 percent in 2019. - OTC trading is not permitted; all transactions must be executed on the stock exchange through a brokerage house, increasing trading costs. - Annualized cost of a total round trip for an outright transaction is of the order of 40-50 basis points of the market price of bonds. ### Guatemala - Investor Base - Commercial banks and the Guatemalan Social Security Institute (IGSS) hold about 65 and 20 percent of government domestic debt, respectively. - AFPs, foreign investors, mutual funds, and insurance companies play a minor role; market remains highly concentrated. - Money Market - Both Banguat and the Ministry of Finance issue their own securities and have longer-term instruments. - Banguat’s stock of securities accounts for almost 50 percent of the outstanding treasury bond amount. - Guatemala’s money market is one of the most active in the region, featuring a relatively deep and liquid cash yield curve, particularly in the short maturity segment. - Primary Market - Auction practices may have constrained development of a yield curve; amounts offered on weekly auctions usually not disclosed and determined by bids received. - Issuance policy lacks predictability and targets often attained before year end. - Practice can harm transparency and price clearing, leading to extra costs in the medium term. - Secondary Market - Secondary market liquidity scarce; turnover ratio around 0.3 percent in 2019. - No reference yield curve. - Structural excess liquidity in the banking sector and an investor base concentrated in a few institutions have hampered secondary market development. ### Honduras - Investor Base - Market shares: public sector pension funds 40 percent, commercial banks 20 percent, AFPs 9 percent. - AFPs’ market share grew from 5.4 percent at end-2015. - Considering central bank recapitalization bonds, the public sector holds about 60 percent of securities issued. - Money Market - BCH holds few government bonds and issues its own securities to implement monetary policy and absorb excess liquidity. - As of 2019, BCH’s outstanding securities accounted for almost 75 percent of the debt issued by the central government. - Yield curve is segmented: BCH issues up to 2 years, government up to 15 years. - Persistent excess liquidity and limited interbank lending tradition have hindered money market development. - BCH launched a platform for money market operations to allow electronic trading and improve liquidity and transparency in the repo market. - Primary Market - Government measures to eliminate distortions include standardization of debt instruments. - Despite increase in average maturity, demand for longer-term tenors is weak; investors argue long-term bond yields inadequately reflect term premia. - Wide variety of tenors at each auction has reduced bond liquidity and incentives for secondary trading. - Incomplete adherence to announced issuance amounts has affected market predictability. - Creation of benchmark bonds hindered by recurrent changes in ISIN, which occurs at least once a year for each instrument. - Secondary Market - Shallow; monthly turnover ratio 0.7 percent during 2019. - Treasury bond yield curve mainly reflects primary market borrowing costs. - High frequency of government and central bank auctions reduces incentives for financial institutions to participate in secondary market. - Transaction costs (e.g. tasa de seguridad) and requirement to use a broker reduce yields and disincentivize participants. ### Nicaragua - Investor Base - Banking system holds around 40 percent of instruments issued by the central government. - Social security’s participation has been reduced considerably due to increasing cash flow deficit. - Money Market - BCN securities represented around 20 percent of total outstanding debt in 2019; these securities tend to concentrate on the shorter end of the curve. - Market fragmentation persists. - Banks’ excess reserves lodged at the BCN have reduced interbank trading and hampered money market development. - Primary Market - Ministry of Finance auctions domestic debt weekly, issuing Treasury Bonds (BRN) with maturities ranging from 1 to 6 years. - Auctions often void due to lack of demand or government rejection of bids. - High frequency of auctions and variety of tenors lead to high fragmentation and reduced bond liquidity. - Secondary Market - Secondary market operations accounted for 2½ percent of the BDVN trading in 2019. - Average monthly turnover ratio reached 0.1 percent of the outstanding stock of public securities. - All secondary market trading goes through the Nicaraguan Stock Exchange (BDVN), which alongside fragmentation affects secondary market liquidity. *Source: IMF working paper content provided in the supplied PDF chapter.* ### 1. Maintain a sound macroeconomic environment. Our study highlights that local currency bond ### 1. Maintain a sound macroeconomic environment. Our study highlights that local currency bond yields are very sensitive to fiscal fundamentals. ### Macroeconomic findings and recommendations - Local currency bond yields are very sensitive to fiscal fundamentals. - Anchor investors’ expectations in moderate fiscal deficits and sustainable debt levels to reduce domestic financing costs and alleviate interest payment burdens. - Increase potential growth to: strengthen tax revenues; improve debt dynamics; reduce overall debt vulnerabilities and country risk premia. ### Empirical notes - To address potential endogeneity between sovereign bond yields and LCBM indicators the authors re-estimated equation (1) using lagged values for the latter; the coefficients and significance remained broadly unchanged relative to the base specification with contemporaneous values for the LCBM indicators. (footnote 13) - Interaction effects are calculated using estimated coefficients and the difference between the best 75th and worst 25th percentile for each LCBM development indicator, in the event of a 10-point increase in the VIX. (footnote 14) ### Policy recommendations (summarized) - Maintain macroeconomic stability through prudent fiscal policy and policies that raise potential growth to lower sovereign financing costs. --- ### 2. Modernize the legal and regulatory framework for debt markets. ### Key reforms recommended - Allow for greater debt management flexibility and promote the trading and holding of securities. - Tax policy: taxes should not be levied solely on the holders of the coupon. - Eliminate mandatory trading through brokerage houses to reduce transaction costs and increase secondary market activity. (continued from page content) --- ### 3. Improve market infrastructure to minimize costs and risks for participants. ### Recommended actions - Promote a sound custodian and settlement infrastructure. - Develop market makers and primary dealers to reduce the costs and risks of holding securities and settling transactions. --- ### 4. Diversify the investor base to promote stable funding and flexible debt management. ### Findings and policy guidance - Expanding investor bases beyond banks and public entities to include private pension funds has shown encouraging experiences in the Dominican Republic, Costa Rica, and Honduras. - Facilitate the formation of fully funded pension systems on individual capital accounts and ensure the tax system does not penalize this type of investment. - Stimulate foreign investor participation through transparent and market-friendly debt management practices, efficient market infrastructure, and fair taxation. - Caution: a large share of certain investor types (notably foreign participation) could increase market volatility; April 2020 GFSR Chapter 3 found financial market depth increases volatility when foreign participation rises beyond a 40 percent threshold. (footnote 15) --- ### 5. Improve coordination between debt management and monetary policy. ### Recommended institutional arrangements - Ministry of Finance should be the sole issuer of securities to avoid market fragmentation. - Central banks could gradually implement monetary policy relying on government securities; this often requires strengthening the central bank’s balance sheet and operational autonomy. - Potential measures include: - Instituting regular transfers of profits/losses from/to the central bank and, where warranted, recapitalizing the central bank with marketable securities. - Establishing mechanisms for the timely provision of government securities for the central bank to execute monetary policy. --- ### 6. Improve primary market debt management practices. ### Priority actions - Expand issuance of benchmark securities at various maturities to create a well-defined yield curve and enhance monetary transmission. - Publish and widely disseminate more strategic Medium-Term Debt Management Strategies (MTDS) that define funding actions for at least one year ahead. - Make auction practices more regular, transparent, and predictable: - Publish an auction calendar for each instrument with predefined auction dates, preferably at regular intervals, regardless of specific funding needs. - Gradually clear auctions at market prices. --- ### B. Developing LCBM in CADR: Sequencing and Lessons from International Experience ### Overall assessment - The CADR region as a whole is in early stages of market development across the six LCBM building blocks, with exceptions for particular countries. ### Recommended sequencing - Prioritize improvements in the primary market: - Publication of updated MTDS. - Increase auction transparency, regularity, and predictability. - Enhance the legal framework and market infrastructure to enable primary and money markets. - As primary and money markets become more effective, focus on: - Enlarging the investor base. - Deepening the secondary market. - Enhancing yield curve formation. - Adjust regulatory frameworks to facilitate creation of collective investment schemes (e.g. private pension funds and mutual funds) and allow for more flexible debt management operations. ### International peer lessons by domain - Debt management and monetary policy coordination: - Mexico: Banco de Mexico allowed to purchase federal government securities for monetary regulation by organic law; a government cash deposit is created at the central bank of the same size, terms, and yield as the securities sold. - Debt management flexibility: - Brazil: legal framework empowers the Head of the debt management office to issue debt and conduct liability management operations at prices below, above, or at par; high transparency and accountability. - Investor relations: - Dominican Republic: 2016−20 MTDS (approved by Parliament and published in 2016) establishes strategic objectives for the debt portfolio and an issuance policy for benchmark instruments; annual borrowing plans with specific target ranges and pre-announced auction calendars. - Efficiency in the tax framework: - Georgia: implemented a competitive tax framework across key classes of investors in primary and secondary bond markets; reforms created uniform tax treatment across primary and secondary markets and aligned tax treatment for institutional investors such as mutual and investment funds. ### Regional initiatives led by CABEI - Creation of a Regional Trading Platform offering clearing, settlements, and custody services to enhance market infrastructure, facilitate cross-border operations, diversify investor base, and increase bond market liquidity. - Creation of a Regional Investment Fund allowing CABEI and extra-regional partners to invest in CADR domestic debt. - Upgrading sovereigns’ credit ratings through CABEI’s partial credit guarantee to enhance credit ratings and access favorable terms to the Mexican market. --- ### Annex I. The LCBM Framework ### Framework structure and methodology - Uses indicators representing key functionalities of each building block; indicators assessed from stage 1 to stage 4. - Indicators ordered sequentially from foundational to sophisticated measures. - Two types of indicators: - Outcome indicators: show the condition of the building block. - Policy indicators: demonstrate current practices by authorities. - Most indicators use binary (yes or no) questions; countries rated 1 (yes) or 0 (no); sum determines indicator stage. - Composite stage at the building block level: - For money market, primary market, secondary market, and investor base: equal weighing of the simple average of assigned stages of outcome and policy indicators. - For market infrastructure and legal and regulatory framework: composite stage is the simple average of assigned stages of policy indicators. ### Four stages of LCBM development (threshold methodology) - Stage 1, or nascent stage: relevant indicator exhibits no functionality. - Stage 2, or developing stage: indicator exhibits some functionality, but severe shortcomings exist. - Stage 3, or emerging stage: basic elements of the indicator’s functionality are established. - Stage 4, or mature stage: indicator exhibits a considerable degree of functionality; broadly corresponds to levels/functionality in LCBMs of advanced economies. - For the investor base building block, stage 4 represents functionalities observed in emerging market economies at a more advanced stage of market development. *Source: IMF working paper content provided in the supplied PDF chapter.* ### Annex II. Status of LCBM Development in CADR ### Annex II. Status of LCBM Development in CADR ### Costa Rica - Investor Base - Non-bank financial institutions (mainly private pension funds, insurance companies, and investment funds) participate around 45 percent and are the main holders of central government debt. - State-owned banks, the social security fund, and other public institutions hold about 8, 17 and 10 percent of the total, respectively. - Private banks’ participation remains low. - Money Market - As of end-2019, BCCR liabilities and government debt amounted to 5 percent of GDP and 45.7 percent of GDP, respectively. - BCCR extensive issuance reflects partly its negative net worth of about 6½ percent of GDP (as of December 2019). - BCCR acts more as a debt than as a liquidity manager. - Money market turnover remained low, at 1.9 percent of the total stock of securities. - Primary Market - Price formation weak because large short-term funding needs impaired competitive processes. - Direct placements (Tesoro Directo) and non-marketable issuances accounted for the majority of financing. - Ongoing efforts: phase out open bond windows and bilateral bond sales; reform bond auction mechanisms so the Treasury becomes a price-taker. - Secondary Market - Relatively illiquid and trades mostly public debt instruments; benchmark prices difficult to identify. - Monthly turnover ratio 6 percent as of 2019. - Secondary market trading handled by the BNV’s securities brokers through a multilateral BNV trading system mandatory for all fixed-income securities transactions. - Additional institutional note - There have been plans for BCCR to issue securities with maturities up to 3 years, leaving the longer segment to the government; in practice the government has also issued shorter-term instruments to meet cash and debt management needs. ### Dominican Republic - Investor Base - As of end-2019, government debt primarily owned by pension funds’ associations (AFPs), representing over a third of the investor base. - Banks and foreign investors hold about 15 and 10 percent, respectively. - The public sector accounts for about 25 percent of total holdings, most of which are central bank recapitalization bonds. - Money Market - The stock of securities issued by the central bank (BCDR) was almost equivalent (ratio of 0.99) to the outstanding amount of domestic debt issued by the central government. - As of 2019, BCDR liabilities and government debt amounted to 13 percent of GDP, respectively. - The relatively large share of central bank securities originates from the quasi-fiscal operations of 2003-2004, where BCDR issued instruments to deal with a banking crisis. - Absence of a predictable auction calendar prevents further deepening of the domestic debt market. - Primary Market - Public debt management operates within a clear and transparent framework, but greater coordination between the Ministry of Finance and the BCRD would enhance predictability. - Price formation hindered by market fragmentation and competing issuers. - Uncertainty about amounts distributed over competitive and non-competitive auction processes has generated yield volatility. - Secondary Market - Trading remains relatively low but volumes have steadily grown during the last decade. - Market-makers program launched in 2012 increased trading volumes and transparency, reducing bid-ask spreads. - Most transactions are operated bilaterally or over the counter (OTC). ### El Salvador - Investor Base - Domestic investor base largely comprises pension funds and commercial banks. - Pension funds represent about 80 percent of total holdings, mainly in the form of Certificates of Pension Investments—pension liabilities of the government. - Commercial banks’ participation in the local investor base is low at around 10 percent, investing mostly in short-dated maturities. - Money Market - The Ministry of Finance is the main securities issuer; the central bank (BCR) intervenes through small and irregular auctions. - Repo market more liquid than the interbank market. - Money market turnover remained low, at around 2 percent of the outstanding stock of securities, amidst structural excess liquidity. - Primary Market - Primary issuance concentrated on Treasury Bills (LETES) and occasionally on Treasury Certificates (CETES). - Domestic yield curve does not extend beyond one year. - Issuance calendars and indicative amounts are published, though auctions often deviate from plans, affecting investor liquidity and strategies. - Current funding strategy exposes the government to refinancing risks. - Secondary Market - Very small; monthly turnover ratio just 0.2 percent in 2019. - OTC trading is not permitted; all transactions must be executed on the stock exchange through a brokerage house, increasing trading costs. - Annualized cost of a total round trip for an outright transaction is of the order of 40-50 basis points of the market price of bonds. ### Guatemala - Investor Base - Commercial banks and the Guatemalan Social Security Institute (IGSS) hold about 65 and 20 percent of government domestic debt, respectively. - AFPs, foreign investors, mutual funds, and insurance companies play a minor role; market remains highly concentrated. - Money Market - Both Banguat and the Ministry of Finance issue their own securities and have longer-term instruments. - Banguat’s stock of securities accounts for almost 50 percent of the outstanding treasury bond amount. - Guatemala’s money market is one of the most active in the region, featuring a relatively deep and liquid cash yield curve, particularly in the short maturity segment. - Primary Market - Auction practices may have constrained development of a yield curve; amounts offered on weekly auctions usually not disclosed and determined by bids received. - Issuance policy lacks predictability and targets often attained before year end. - Practice can harm transparency and price clearing, leading to extra costs in the medium term. - Secondary Market - Secondary market liquidity scarce; turnover ratio around 0.3 percent in 2019. - No reference yield curve. - Structural excess liquidity in the banking sector and an investor base concentrated in a few institutions have hampered secondary market development. ### Honduras - Investor Base - Market shares: public sector pension funds 40 percent, commercial banks 20 percent, AFPs 9 percent. - AFPs’ market share grew from 5.4 percent at end-2015. - Considering central bank recapitalization bonds, the public sector holds about 60 percent of securities issued. - Money Market - BCH holds few government bonds and issues its own securities to implement monetary policy and absorb excess liquidity. - As of 2019, BCH’s outstanding securities accounted for almost 75 percent of the debt issued by the central government. - Yield curve is segmented: BCH issues up to 2 years, government up to 15 years. - Persistent excess liquidity and limited interbank lending tradition have hindered money market development. - BCH launched a platform for money market operations to allow electronic trading and improve liquidity and transparency in the repo market. - Primary Market - Government measures to eliminate distortions include standardization of debt instruments. - Despite increase in average maturity, demand for longer-term tenors is weak; investors argue long-term bond yields inadequately reflect term premia. - Wide variety of tenors at each auction has reduced bond liquidity and incentives for secondary trading. - Incomplete adherence to announced issuance amounts has affected market predictability. - Creation of benchmark bonds hindered by recurrent changes in ISIN, which occurs at least once a year for each instrument. - Secondary Market - Shallow; monthly turnover ratio 0.7 percent during 2019. - Treasury bond yield curve mainly reflects primary market borrowing costs. - High frequency of government and central bank auctions reduces incentives for financial institutions to participate in secondary market. - Transaction costs (e.g. tasa de seguridad) and requirement to use a broker reduce yields and disincentivize participants. ### Nicaragua - Investor Base - Banking system holds around 40 percent of instruments issued by the central government. - Social security’s participation has been reduced considerably due to increasing cash flow deficit. - Money Market - BCN securities represented around 20 percent of total outstanding debt in 2019; these securities tend to concentrate on the shorter end of the curve. - Market fragmentation persists. - Banks’ excess reserves lodged at the BCN have reduced interbank trading and hampered money market development. - Primary Market - Ministry of Finance auctions domestic debt weekly, issuing Treasury Bonds (BRN) with maturities ranging from 1 to 6 years. - Auctions often void due to lack of demand or government rejection of bids. - High frequency of auctions and variety of tenors lead to high fragmentation and reduced bond liquidity. - Secondary Market - Secondary market operations accounted for 2½ percent of the BDVN trading in 2019. - Average monthly turnover ratio reached 0.1 percent of the outstanding stock of public securities. - All secondary market trading goes through the Nicaraguan Stock Exchange (BDVN), which alongside fragmentation affects secondary market liquidity. *Source: IMF Staff* --- _Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021283-print-pdf.pdf_