Question

What is the integration of bond markets. Explain why adverse conditions within one bond market (such as a particular country) commonly spread to other bond markets.

Answer 1

Integration of Bond Markets:
Due to the advancement of technology and globalisation, it has become easier for an investor to do cross border investments. Countries are coming with bonds like dual currency bonds, currency options bonds. Many funds are investing in foreign bonds in order to achieve higher returns on their investments. Financial institutions are providing loans to customers in other countries.

Why adverse conditions within one bond market (such as a particular country) commonly spread to other bond markets.?

Suppose a country's government has borrowed from a financial institution based in a different country. If the Government defaults i.e. not able to repay, then it can put the creditors in a financial distress situation. Creditors will then default on the loan which they have take from their banks. Thus adverse conditions within one bond market (such as a particular country) commonly spread to other bond markets.