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What are SDR Denominated Bonds?


The term 'SDR Denominated Bonds' is included in the Banking edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

SDR denominated bonds are a fairly recent phenomenon. These are bonds issued in special drawing rights currency units. SDR units are a basket of the world’s most important currencies including the U.S. dollar, Euro zone euro, Japanese Yen, British pound sterling, and the Chinese Yuan. The International Monetary Fund’s executive board approved a framework to issue such bonds to member nations and central banks back on July 1, 2009.

The principle of these SDR denominated bonds was intended to be allocated in SDRs. The market for such bonds was established initially as the official sector of IMF members. This meant it was to include primarily the member nations, relevant central banks, and another 15 holders of SDRs.

Included in these 15 prescribed holders are four central banks which were regional, eight developmental organizations, and three monetary agencies which were intergovernmental. Others allowed to trade in them were the fiscal agencies of the members. This means that a number of sovereign wealth funds were allowed to participate as there are not always distinguishing lines between national monetary authorities and their sovereign wealth funds. This is the case with Hong Kong and Saudi Arabia.

The IMF issued SDR denominated bonds were to start with three month maturities that could be extended to as long as five years. Interest payments on these instruments were quarterly. China signed an agreement to buy upwards of $50 billion of them, while Russia, India, and Brazil intended to buy as much as $10 billion each.

SDR denominated bonds again gained the international spotlight in August of 2016 when the World Bank’s IBRD International Bank for Reconstruction and Development priced the first such bond in the Interbank Bond Market of China. This bond raised 500 million SDR units, which were equal to about $700 million US dollars. These bonds came with a three year maturity date. Their coupon interest payment rate was .49% per year. What made them most notable was that the payments are issued in Chinese Yuan.

This group of bonds is only the first batch. The full size of the issue approved by the World Bank SDR Denominated Issuance Program in August 12, 2016 is for 2 billion SDR’s, making them equal to roughly $2.8 billion US dollars.

Even in China, placing so many SDR denominated bonds is a challenge. This is why the joint lead managers for the Interbank Market were several important banks with great depth in China. These included HSBC Bank of China Company Limited, the Commercial Bank of China Limited, China Development Bank Corporation, and China Construction Bank Corporation.

The issue was a great success. The significant interest in them led to a 2.5 times oversubscribing. Orders amounted to roughly 50. Fifty-three percent of them came from bank treasuries, 29 percent from central banks and official institutions, 12 percent from asset managers and securities firms, and six percent from insurance companies. These bonds will mature on September 2, 2019 with all payments coming from the World Bank’s IBDR to be made to bond holders in Chinese Yuan.

The term 'SDR Denominated Bonds' is included in the Banking edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.