The predominance of buy-and-hold investors;

The lack of markets and market makers for private sector bonds;

The patchy availability of markets for hedging and funding transactions;

The lack of timely information on trading activity, issuer performance, and credit quality.

The predominance of buy-and-hold investors underlies the need to diversify the investor base. Institutional investment is highly regulated in some emerging markets, and retail investors are in the minority, typically following a buy-and-hold strategy. Also, international investor participation is low because of the policy challenges that exist and because of withholding taxes and other regulatory restrictions, which all serve to discourage participation.

Policymakers in some developing markets have tried to overcome the lack of international investor participation by creating their own approved investor - the Asian Bond Fund - a joint venture vehicle of the central banks of the countries involved. However, this fails to address the policy issues that are constraining market development.

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* Contributed by: -
Philip Bayley is Primary Credit Analyst with Standard & Poor's, Melbourne.