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Second Asian bond fund draws nearer

Bonds

Central bankers make progress in removing barriers and building infrastructure to attract investors

Central banks and governments in Asia were making 'good progress' in their bid to launch a second pan-Asian bond fund aimed at investing in regional currency bonds, according to Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong.

Opening an Asia-Pacific bond market conference in Hong Kong, Mr Yam yesterday said the 11-member Executives' Meeting of East Asia and Pacific Central Banks Group (EMEAP) was reducing barriers and building infrastructure to draw investor interest.

He said the group's next 'concrete initiative' would be the launch of Asian Bond Fund 2 (ABF 2) - a successor to ABF 1 it launched in June last year to invest in US-dollar bonds issued by sovereign and quasi-sovereign regional issuers. Unlike the first fund, established with US$1 billion of seed capital provided by EMEAP partners, ABF 2 would be mandated to invest in domestic currency issues.

Reporting on ABF 2, the EMEAP Group said it was exploring a two-part structure for the fund comprising a Pan-Asian Bond Index Fund and a Fund of Bond Funds.

But bond investors, distributors and issuers at the conference warned the initiative faced cross-border legal, regulatory and policy challenges likely to limit the appeal of domestic-currency bonds.

The goal of keeping Asian savings 'at home' and invested in domestic bonds and regionally traded bond index funds would be served best by 'keeping the Asian Bond Fund within the unified set of Asian preferences, which is in US dollars and perhaps Euros', Citigroup Global Markets Asia head of debt capital markets for the Asia-Pacific Aamir Rahim said.

'It becomes more challenging when you go beyond commonly accepted currencies and try to internationalise within Asia. There are too many regulations and not enough hedging instruments,' he said.

State Street Global Advisors chief executive Timothy Harbert said his firm was working closely with EMEAP on designing ABF 2. 'The good news is that EMEAP countries are showing a real political desire to create a greater impetus for bond markets. That in turn promises greater cross-border integration, which is a development that should make the region more stable and more attractive to large institutional investors,' he said.

Mr Harbert was optimistic but warned progress on ABF 2 depended on harmonising legal and regulatory environments. Pacific Asset Management chief investment officer Ho Tian Yee said a dependable regulatory environment was a precondition for growth in a regional bond market.

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