BIS review: Money and bond market activity shows rise in first nine months of 1999 over 1998 levels

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Primary market activity in the money and bond markets moderated slightly in the third quarter of 1999, but remained well above the average for the third quarter of 1998, according to the Bank for International Settlements. In the first three quarters of this year, according to the Bank's Quarterly Review: International Banking and Financial Market Developments, the volume of new securities reached $1.8 trillion, surpassing that for 1998 as a whole. Apparently, the report explains, the rise of long-term interest rates in Europe and the United States did not hamper issuing activity in the international securities markets in the third quarter.

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The most striking development during the quarter, the report notes, was the extraordinary widening of spreads on U.S. dollar and sterling interest rate swaps. Spreads on U.S. dollar swaps, in particular, exceeded third-quarter 1998 levels, perhaps reflecting liquidity pressures, with the increase in corporate bond issuance leading to an unusual amount of swap hedging activity by underwriters and investors. There was no credit event in the third quarter of 1999 as large as Russia's debt moratorium in August 1998. However, financial market participants seemed troubled by several disturbing announcements, including Daewoo's default on its domestic and foreign loans, which caused a run on investment trusts and disrupted offshore securities markets, and, shortly afterward, rumors that Ecuador would miss an August payment on some of its outstanding Brady bonds, marking the first time a country missed a payment on its Brady debt. Fortunately, according to the report, these events did not create contagion on the scale that occurred in 1997 and 1998.

Since the beginning of 1999, the international bond market has recovered rapidly, the report states. While announcements of international bond and medium-term note issues declined by 8 percent, to $411 billion in the third quarter of 1999 from the previous quarter, they remained much higher than the...