Asian bond fund prepares phase two

Asian central bankers are close to finalizing the second stage of their masterplan to create a regional bond market.

A group of Asian central banks are ready to appoint financial advisers to help implement the second phase of their Asian bond fund initiative. The executives' meeting of East Asia and Pacific central banks (EAMAP) will launch a fund of bond funds and a pan-Asian bond index fund that, it is hoped, will provide the infrastructure to spur the development of bond markets around the region.

The group involves central banks from Australia, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Taiwan, Thailand, Singapore and South Korea. The initiative aims to help create domestic bond markets throughout the region that will eventually provide Asian companies with the ability to raise substantial funds in their local currency bond markets instead of raising more expensive cash in the offshore market.

Those economies with mature bond markets will not be included in the fund of funds. Issuers in Australia, Japan and New Zealand are already able to sell bonds easily into their domestic markets. However, the lack of large institutional buyers, such as pension funds and insurance companies, in the other eight economies has hindered the ability of local entities to raise cash in local currencies.

The problem is not a lack of appetite. Asians are net savers, but without an established infrastructure to tap into that local liquidity domestic bond markets have failed to flourish, even in Hong Kong and Singapore. The fund of bond funds will address this structural failure by creating a pool of domestic liquidity, in the form of eight local sub-funds, that will invest in sovereign and quasi-sovereign paper.

The pan-Asian bond index fund will invest in local-currency bonds from all of the EAMAP markets, providing investors with a diversified exposure to Asian credits.

No agreement has yet been reached between the banks as to how much money they will commit to seed the funds or even whether all the central banks will take part. "This is an entirely voluntary project," said an official at the Hong Kong Monetary Authority during a background briefing on the new framework.

Both funds will adopt rules-based investment strategies that will be finalized after the appointment of the financial advisers. The funds will be run by a private sector manager, unlike the first bond fund, which was managed by the Bank for International Settlements. The initial size of the funds is also yet to be decided. "It will not be so big as to crowd out the market," the official said.