Mongolia Brings Back Government Bonds as Corporate Debt Surges and Risks Persist

Mongolia’s bond market has revived strongly with the return of government bond issuance and rapid growth in corporate bonds, but structural weaknesses remain. Stronger investor protection, modern market infrastructure, and a broader investor base are now critical to turning momentum into long-term financial stability.

Mongolia’s bond market is stirring back to life after nearly a decade on the sidelines. According to a new country assessment by the Asian Development Bank (ADB), produced in coordination with the Ministry of Finance, the Financial Regulatory Commission, and the Bank of Mongolia, the country has taken important steps to revive its local currency bond market, but much remains unfinished. The report places Mongolia’s experience within the broader reform agenda shaped by IMF-supported programs and regional capital market development efforts, arguing that bonds are not just financial instruments but essential tools for economic stability and long-term growth.

A Key Turning Point: Government Bonds Are Back

The most significant recent development came in April 2025, when Mongolia resumed issuing domestic government bonds for the first time since 2017. Issuance had been suspended during the IMF’s Extended Fund Facility program as part of strict fiscal consolidation. Its return marks a structural turning point. Government bonds provide a benchmark interest rate, a reference point that helps price corporate bonds and other financial products. Without them, companies had been forced to rely on commercial bank deposit rates, limiting bond maturities and reinforcing Mongolia’s dependence on banks. The new unified auction system, operated through the Mongolian Stock Exchange, is now laying the groundwork for a proper yield curve across short-, medium-, and long-term maturities.

Corporate Bonds Boom, But Legal Gaps Remain

While government bonds were absent, corporate bonds quietly took off. Regulatory reforms introduced since 2020, including simplified issuance rules and the creation of a regulated over-the-counter (OTC) bond market, have transformed corporate financing. Companies can now issue bonds in weeks rather than months, and more than 750 corporate bond issuances have taken place through the OTC market since 2021. This market has grown so rapidly that it now exceeds the stock exchange in trading volume.

Yet the ADB report warns that fast growth is outpacing legal safeguards. Mongolia still lacks clear, bond-specific rules for handling defaults or protecting investors if issuers fail. In many cases, bond underwriters act as de facto representatives of bondholders, creating conflicts of interest. Without stronger legal clarity, common in more mature markets, confidence could erode as issuance volumes continue to rise.

Weak Market Plumbing Behind the Scenes

Behind the surge in activity lies a more fragile reality. Mongolia’s financial market infrastructure, its settlement systems, clearing functions, and securities depositories, rely on IT platforms that are nearly 20 years old. Although the Bank of Mongolia has invested in modern payment and depository systems, weak coordination among institutions has slowed their full adoption. The risk, the report argues, is that outdated “plumbing” could increase settlement failures, raise costs, and undermine trust just as the market begins to scale up.

Too Few Investors, Too Much Concentration

Another major challenge is who actually buys bonds. Mongolia’s investor base is narrow. Commercial banks and wealthy individuals dominate the market, while pension funds remain part of the state budget, insurance companies face restrictive investment rules, and mutual funds are still small and often distrusted by the public. Retail investors are largely excluded from the fast-growing OTC market, and foreign investors face complex procedures, taxes, and the absence of global custodians such as Euroclear or Clearstream. Without a broader and more diverse investor base, bond trading remains thin and secondary markets struggle to develop.

An Inflection Point, Not a Finish Line

The ADB’s conclusion is cautiously optimistic. Mongolia has built much of the basic architecture of a local currency bond market and restored its most important missing piece, government bonds. But the system remains uneven. Legal protections need strengthening, infrastructure must be modernized, investors diversified, and intermediaries consolidated and professionalized. The report’s message is clear: if reforms are sequenced carefully, Mongolia’s bond market can evolve from a fast-growing niche into a stabilizing force for the economy. If not, today’s momentum risks becoming another missed opportunity.