Primary issuance techniques promoting

secondary market development

Example of the Hungarian Government Debt Management Agency (www.akk.hu) – stylized facts

by Werner Riecke (werner.riecke@gmail.com)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030

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Publicly issued local currency T-bonds and -bills and share in total central government debt

Treasury Bonds Treasury Bills Share (RHS)

Billi

ons o

f HUF

The main guiding principles for government securities market development

• Simplicity• Transparency• Liquidity

Choice of Instruments (case of Hungarian Government Debt Management Agency)• Treasury bills

• 3 and 12 months tenor

• Treasury bonds• fixed coupon bullet bonds• 3, 5, 10, 15 years tenor

• Let the market create more complex instruments if there is a demand for.

Example: one amortizing bond = four bullet bonds issued in parallel

Other examples:Bullet bond = Zero coupon bond + AnnuityVariable rate bond = successive series of T-billsSecondary market prefers simple fixed income instruments!

Transparency

• Regular Issuance• Primary placement through auctions• Publication of the auction calendar• Refrain from private placements• Refrain from captive measures• Use of re-openings and buy backs (also through

auctions) – later on switching auctions

Auction calendar (auctions, settlement and redemption dates)

Market structure

• Issuer: GDMA on behalf of MoF• Settlement infrastructure: Central Securities Depository and

Clearing House• Primary dealers (nowadays mainly banks)

• binding bid-offer price quotations for benchmark issues on the secondary market

• Investors – Hungary’s early success in government securities market development is rooted

• in the presence of institutional investors (insurance, investment funds, compulsory and voluntary funded pension schemes)

• appearance of foreign investors in the local currency bond market

Secondary market turnover

price/yield discovery in multiple price auctions, dealing with the “winners’ curse”• We are not setting a cut-off price or yield, we

decide on the amount to be accepted• cut-off/average price/yield is a consequence of this

decision

• Decision based on bidding curve chart (visual)• We may however decide to deviate from the

amount originally offered by +/- 33.3% to• Reduce the “tail” – difference between

• average and minimum accepted price or• maximum accepted and average yield

Dealing with the winners’ curse in multiple price auctions:

Accepting less dampens the difference between average and minimum accepted price, accepting more, when bidding curve is more flatAccepting 250 million of bids amount Accepting 200 million – smaller tail

Creating a yield curve: use X-Y (scatter) instead of line chart

Date Settlement Date Tenor ISIN Code Security Maturty (days) Yield (%) Change AVG Bid (%) AVG Ask (%) Price (%) Acc. Interest (%)12.06.2015 16.06.2015 M3 HU0000520168 D150916 92 1.10 0.00 1.20 1.00 99.7197 0.0000 12.06.2015 16.06.2015 M6 HU0000520317 D151223 190 1.09 0.03 1.19 0.99 99.4281 0.0000 12.06.2015 16.06.2015 M12 HU0000520580 D160608 358 1.09 0.00 1.19 0.99 98.9278 0.0000 12.06.2015 16.06.2015 Y3 HU0000402979 A180622C15 1 102 2.15 - 0.02 2.25 2.05 101.0176 1.0479 12.06.2015 16.06.2015 Y5 HU0000402953 A200624B14 1 835 3.01 - 0.05 3.11 2.91 102.2695 2.5411 12.06.2015 16.06.2015 Y10 HU0000402748 A250624B14 3 661 3.95 - 0.01 4.05 3.85 112.6426 5.3795 12.06.2015 16.06.2015 Y15 HU0000402532 A281022A11 4 877 4.01 - 0.02 4.11 3.91 127.8940 4.3829

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Line Chart: Yield (%)

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X-Y Chart: Yield (%)

Set up a database with all matured, issued and planned instruments and transactions• Click on a government security ID shows its cash

flow table

10Y fixed coupon bond, 6.75% annual coupon, face value HUF10000, odd first coupon date

Database

• contains all instruments ever issued by GDMA• including securities, loans, swaps, local currency

and FX denominated• one Excel workbook for each instrument, including

transactions• operated through an Excel-Access framework• Used for planning, reporting, input for Monte Carlo

simulation to establish benchmarks

AKK is exclusively responsible for managing Central Government’s debt.

Public debt and external debt data compiled by the central bank’ – National Bank of Hungary’s Statistical Department – not a DMO.

Thank you for your attention.

Werner Riecke