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Capital markets

The issuance (primary) and subsequent trading of government bonds (secondary) are usually seen as capital market activities. The term ‘capital markets’ comprises all relations, transactions, rules and customs between banks, asset management, insurance companies, central banks, investment firms and other financial institutions that determine the pricing and trading of, inter alia, bonds. 

The difference between capital market and money market lies in its maturities. For the DSTA, the money market consists of the short end of the Dutch yield curve, up to 1 year. The capital market runs from 1 to 30 years. The DSTA is active in the euro capital market. In its Outlook 2010, the DSTA announced it has plans to issue a US dollar denominated bond on condition that this reduces the funding costs.

Dutch State Loans

In order to satisfy its funding needs, the Dutch State issues bonds, known in the market as Dutch State Loans (DSLs). The holder of the bond is a creditor of the State. The State has the obligation to pay interest and to redeem the principal of the bond. The most important characteristic of Dutch State Loans is their security. As the State has the highest possible creditworthiness (AAA), the State guarantees full and timely payments of interest and redemptions. In financial markets, the Dutch State is traditionally recognized as one of the most secure and creditworthy debtors, along with e.g. Germany and France.

Dutch State Loans have a fixed maturity. For example, every year a new bond with a maturity of 10 years is issued. The day the bond will be redeemed is fixed in time and the holder of the bond receives an annual interest. Interest payments on the 10-year bond always take place on 15 July. This interest payment is referred to as the coupon. The name goes back to a time when bonds consisted of a main sheet and detachable coupons that could be presented annually to claim payment of the interest. Today, interest payments take place electronically, but the notion of coupons has survived.

DSLs are either auctioned via a tap auction or a Dutch Direct Auction. For more informations, see the Subject Auction methods. For more details on the DDA, see Subject DDA.

Strips

The process of trading the coupon of a bond seperately from the principal (or body) is known as 'stripping’. The resulting products are referred to as 'STRIPS' (Seperate Trading of Registered Interest and Principal Securities). All Dutch bonds are strippable.

Stripping a bond generates seperate cash flows: a series of annual coupon payments and the single redemption at maturity. The return on these cash flows is formed by the price difference between purchase and payment. Acquiring seperate cash flows might be interesting for investors who want to match liabilities at a specific time in the future, without being confronted with reinvestment risk in the meantime due to coupon payments. Furthermore, STRIPS can be an appropriate instrument to adjust an investment portfolio.

STRIPS are, just like bonds, subject to the Dutch law on securities. The procedure for settlement and payment of coupons and redemptions is equal to that of regular bonds. Trade in STRIPS takes place on Euronext among other platforms.

An overview of the ISIN codes of the strippable bonds and the STRIPS can be found here.

For more information:

• Outlook

  Publication | 02-11-2009

  This is the link to the annual publication of the DSTA.

• Issuance calenders

  03-03-2010

  This is the link to the annual and quarterly issuance calendars of the DSTA.