The Bulgarian government has in the last year made serious efforts to develop the country's debt capital markets. For starters, in 2000 it succeeded in extending its yield curve out first to three years and then to five. It plans to take the curve out to 10 years in the near future.
"The Bulgarian government can handle itself to five years fairly successfully," says Sharon Raj, a sovereign analyst at Fitch in London. "It wants to take its yield curve out beyond that and it wants to provide more instruments."
She adds: "The main reason for developing the market is that the government is setting up pension funds through its three pillar pension reforms and the funds will need long term instruments to invest in."
In future, private pension funds are expected to take a large share of the Treasuries market. According to the new law, they are obliged to invest 50% of their assets in government securities and bank deposits.
Bulgaria started introducing its second and third pillars two years ago and money began flowing in last year.
The insurance sector is developing, too. The entrance of the Health Insurance Fund is expected to boost demand. So too will the commercial banks - thanks to their conservative credit policy, allied with their portfolio requirements to service the budget and the reduction last year of their reserve requirements to 8% from 11%.
Foreign investors are also showing more interest in the Bulgarian bond market - owing to the country's zero short term currency risk. They have been largely absent from the market since late 1997, when they pulled out in the wake of the Asian crisis.
The bond market only began in 1990 with the issuance of T-bills and T-bonds by the government to finance its deficit. Since 1992 there have been regular issues of book-entry government securities conducted by the Bulgarian National Bank on behalf of the ministry of finance.
There are four types of government securities available: government securities for budget deficit financing (T-bills) that are placed in the primary market through weekly auctions; government securities issued for structural reform (ZUNK bonds); deposit insurance government bonds which have been issued to repay depositors in commercial banks gone bankrupt; and government securities targeted at retail investors, which are limited to 20% of the total domestic government securities.
ZUNK bonds replaced bad loans extended to state owned enterprises in the Soviet era. What little foreign investment there is exists in these bonds, which are amortising dollar denominated bonds maturing in 2019, and which can be used as payment in privatisation deals.
In July 1999 the fledgling domestic market took a major step forward, when IT firm ProSoft became the first private company to issue corporate bonds and list them on the stock exchange, selling Lev300,000 of five year bonds. In October last year it then launched a Lev3m 18 months issue paying annual interest of 10%.
However, despite the fanfare heralding these issues, there have been few other corporate bonds and the market remains undeveloped.
Bulgaria itself is looking at issuing a euro denominated bond in the first half of next year, say bankers, to use the proceeds to buy back more of its Brady bonds.
Bankers are impressed that the new government in Bulgaria has appointed several former London-based bankers and expect them to make efforts to further develop a domestic bond market. NP