1 Intro Building Yield Curve for Asian Bond Markets The Challenges and the Road Ahead By Nitin...
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1
Building Yield Curve for Asian Bond Building Yield Curve for Asian Bond
MarketsMarkets
The Challenges and the Road AheadThe Challenges and the Road Ahead
By
Nitin JaiswalNitin Jaiswal
Shanghai, May 2006Shanghai, May [email protected]@bloomberg.net
2
Presentation OverviewPresentation Overview
• Overview of the Asian Bond Market• Evolution of a Developed Bond Market• Importance of Yield Curve for Asian Markets• Critical Success Factors for a Yield Curve• Building Yield Curve for Asian Markets
Current Status
Challenges
Going Forward• Bloomberg Experiences and Contribution• Presentation wrap-up• Building Bond Markets for Asia – your
thoughts, your
ideas and your questions.
3
Asian Bond Market OverviewAsian Bond Market Overview
• Post Financial Crisis of 1997, the Asian Bond Markets
have rebounded, expanded and are in sound position
to withstand any major crisis• Bond Market Size US$1.3 trillion in 1996 to US$4
trillion in 04 • Asia represents 60% of total, growing from US$692
billion in
1996 to US$2.3 trillion in 2004.• At US$ 2.3 trillion, the bond market in these countries is
now equal to
about 48% of their combined GDP. The debt market in the U.S.
is twice
as big as the economy
• Asian Bond Markets has returned more then 61% in
USD terms, compared with 28% return on a Merrill
Lynch Index of US debt in the same period
•The returns by individual countries have been
impressiveCountry 5 Yr Return Country 5
Yr Return Indonesia 225% Philippines
87%
South Korea 88% India
75%
4
Asian Bond Market Overview (contd.)Asian Bond Market Overview (contd.)
•One area where the region still lags behind is liquidity
•According to BIS in Hong Kong, overseas investors
hold between 1% and 3% of Asian markets debt
•Globally, the share of foreign creditors in domestically
issued emerging market debt has doubled to 12% from
2000 to 2005
•According to IMF Asian Local – currency debt continue
to be underrepresented in global investment portfolio
• In 2003, over 70% of total cross-border investment
from Asia was fixed income related, and 80% was
directed to Europe and the US. Only 5% of Asian total
cross-border portfolio investment was directed to other
Emerging East Asian market.
5
Asian Bond Market Overview (contd.)
•The Asian Bond Market is deepening but not at the
pace every one of us expect it to be.
•The aim of the Asian Markets should be to ensure
that investors feel comfortable placing their funds in
the region.
• This requires the creation of a more robust financial
system that facilitates Price Discovery and Efficiency,
Legal Certainty and Information Transparency.
•The initiatives of ABMI is in the right direction.
6
Evolution of a Developed Bond MarketEvolution of a Developed Bond Market
Seven Steps towards a developed bond
market:
1. Issuing of sovereign bonds
2. Development of money market benchmarks
3. Development of Yield Curve and valuation
models
4. Issuance of corporate bonds
5. Development of related and hedging
instruments
6. Development of Structured Products
7. Introduction of Electronic Trading
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Importance of Yield Curve For Asian Bond Importance of Yield Curve For Asian Bond MarketsMarkets
• Asian Bond Markets lack liquidity
• Transparency attracts investment •Transparency is generated through well developed
Yield Curve
• Lack of hedging opportunities in Asian market • Yield curve can help to kick start the process
•Better risk management through valuation of portfolio•Yield curve helps in valuation
A well developed Yield Curve for Asia will be an
important step in the over all success of the Asian Bond
Market Initiative
8
Critical Success Factors for a Good Yield Critical Success Factors for a Good Yield CurveCurve
• Selection of Benchmark bonds
• Commitment from market participants to provide good
prices
for the benchmark.
• Robust Model to calculate consensus price and fair
values
• Endorsement and Acceptance by all market
participants
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Building Yield Curve for Asian MarketsBuilding Yield Curve for Asian Markets
Three major classification of curves
• Money Market Curves
• Government Bond Curve
• Corporate Bond Curve
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Money Market Curves in AsiaMoney Market Curves in Asia
Asian markets are doing a good job with Money
Market Curves
Current Status :
•Number of Countries with Money Market Curve : 16•Number of Countries having basis swaps/CCS : 7
Challenges :
•Availability of fixings to all market participants
•Duplication of fixings leading to confusion
11
Government Bond Yield Curves in AsiaGovernment Bond Yield Curves in Asia
Current Status:
• Number of Asian Countries with
Issued Govt. Bonds
: 19
Established yield curve in some
form : 15
• Number of South American countries with
Issued Govt. Bonds
: 15
Established yield curve in some
form : 6
• Issuance of bonds in the benchmark maturity period:
2 yr 5 yr 10 yr 15yr 20 yr
30yr
----------------------------------------------------------# of countries
13 15 15 14 10 8
12
Government Bond Yield Curves in AsiaGovernment Bond Yield Curves in Asia
Current Status:
• The performance of Asian Markets has been better
than other
Emerging Markets
• The challenge is to take the next logical step
15
Govt. Bond Yield Curve - ChallengesGovt. Bond Yield Curve - Challenges
• Standardization
• Commitment
• Recognition
• Distribution
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Govt. Bond Yield Curve – Challenges Govt. Bond Yield Curve – Challenges
(contd.)(contd.)Standardization
• Benchmark selection process• Calculation methodology • Generation of related curves – par coupon & zero coupon
curve
Commitment
• Many Asian countries do not have the mechanics of
Primary
Dealers to actively provide two way prices.
• Regulators need to make sure that the market
participants
commit to providing good prices for yield curve
generation.
17
Govt. Bond Yield Curve – Challenges Govt. Bond Yield Curve – Challenges (contd.)(contd.)
Recognition
• The regulators and market participants need to
accept and
recognize a particular yield curve
• Will remove confusion and bring transparency into
the
market
Distribution
The accepted curve should be
•Promoted aggressively
• Made easily available to all the market participants
18
Government Bond Yield Curve- ImportanceGovernment Bond Yield Curve- Importance
• The corporate bond market would greatly benefit
from a
liquid Govt. bond yield curve
•Helps in kick starting the repo, futures and
derivatives
market
•Brings Transparency and better risk management
practice in the market
•Eventually brings liquidity – the ultimate goal of
the Asian Bond Market Initiative for the region.
19
Building Corporate Bond Yield CurveBuilding Corporate Bond Yield Curve
• Generating Yield Curve for the corporate bonds market
is the biggest and most daunting challenge for all
emerging markets.
• The regulators have to give more thought and time for
building the yield curves for the corp. bond market.
•According to a ADB report, between 2005 and 2010, the
East Asian economies will need more then USD 150 bln.
to investment in infrastructure projects to meet the
expected growth in the GDP.
•Majority of the money has to come from the local
currency bonds and not through foreign currency bonds
(currency risk) and bank loan (securitization of long
gestation infrastructure projects)
•Current Status : Confusion.
21
Building Corporate Bond Yield Curve- Building Corporate Bond Yield Curve- ChallengesChallenges
Key Issues:
• Lack enough Commitment from regulators and
market participants to build the curve
• No agreement between fund management and
bank associations to work towards building the curve
• Tendency to follow complicated models
• Lack of Liquidity even in benchmark bonds
• Not enough issuers and also availability of bonds
across the curve maturity period.
22
Building Corporate Bond Yield Curve-Building Corporate Bond Yield Curve-
Lacking ConsensusLacking Consensus
Country/Region
• Korea
• China
• Philippines
• Thailand
• Malaysia
• Indonesia
• India
• Pakistan
• Chinese Taipei
Model
• Pricing Agency
• No Model
• Yield Matrix
• Multiple Models
• Pricing Agency
• Actual Traded Prices
• Discretion Yield Matrix
• No Model
• Yield Matrix
23
Building Corporate Bond Yield Curve-Building Corporate Bond Yield Curve-
Lack of number of investment grade issuers:
Malaysia one of the biggest Corporate Bond
Market:
Total number of corporate bonds : 2100
AAA rated Corp. bonds by RAM : 1400
Number of AAA Rated issuers : 19
Number of AAA rated issuers with more then 5 issues : 9
Number of corp. bonds traded on BIDS in lat 7 days : 21
Number of Corp Bonds in Asia ex Japan and Australia :
19668
24
Building Corporate Bond Yield Curve- Next Building Corporate Bond Yield Curve- Next StepsSteps
Going Forward:
•Regulators should play a key role in building a well
accepted yield curve
• Be the facilitators
•Generate a consensus on the methodology to follow for
building the curve
•Ensure simplicity in the development :Models should be
easy to understand and use
•Ensure easy availability of the curves
25
Bloomberg Experience and Contribution Bloomberg Experience and Contribution
• Worked closely with many regulators, market
associations and market participants across the globe in
building curves and valuation models
•Today, Bloomberg either generates or carries over 150
yield curves for global fixed income markets
• Bloomberg has well accepted, robust models to
generate the yield curve, fair market curve and zero
coupon curve
•The BGN and the BFV models have evolved over a
period of 20 years and stood the test of time and varied
market conditions
• With our global presence, Bloomberg helps in
providing visibility and transparency for the curves
27
Concluding RemarksConcluding Remarks
• The regulators understand the urgent need to
improve the liquidity for local currency Asian bond
markets.•Asian Bond Market Initiative (ABMI) and two Asian
Bond funds launched last year
• Under the umbrella of ABMI, a process should be
put in place to standardize the process of building
and distributing the curve.•A well constructed and recognized curve can go a
long way in the meeting the objectives of ABMI
• Bloomberg has worked with many Bond Markets
Association in Asia in building yield curves
• Bloomberg, with it global presence, expertise
and resources is committed to work with Asian
Bond Market participants for building a robust
fixed income market for Asia