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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 2006njaiswal@bloomberg.netnjaiswal@bloomberg.net

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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.

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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%

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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.

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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.

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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

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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

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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

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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

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Yield Curve For

Asian Markets on

Bloomberg.

APFM GO

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Yield Curve For

Asian Markets on

Bloomberg.

GRAB GO

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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.

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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

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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.

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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.

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Yield Curve Coverage for Asian Markets on Bloomberg.

GRAB GO

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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.

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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

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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

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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

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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

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Valuation Projects

in partnership with

Fixed Income

Market Association.

GRAB GO

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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

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Building a Robust Asian Bond MarketsBuilding a Robust Asian Bond Markets

• Your Thoughts

• Your Ideas

• Your Questions

•Data source: IFM, IFC,ADB and Bloomberg