The aim of the ABF2, as well as its predecessor ABF1 - a fund launched last year to invest in the US dollar-denominated bonds of regional issuers - was to stimulate interest among investors and 'broaden and deepen the domestic and regional bond markets in Asia', Ms Leung said.

The initiative got under way in June 2002 in the wake of the Asian financial crisis, triggered partly by the excessive dependence in the region on short-term finance and bank lending, rather than more stable long-term debt capital.

Asia's scant and inefficient bond markets, said critics in the post-mortems that followed, had left the region vulnerable to a re-run of the financial crisis and, eight years on, the risk of new contagion from any similar, unforeseen loss of confidence remained, they argued. Active debt capital markets would help limit such risks, they said.

State Street Global Advisors, the investment management arm of Boston-based State Street Corp, and manager of Hong Kong's Tracker Fund, had won the mandate to manage the ABF Pan-Asia Bond Index Fund (PAIF), Ms Leung said yesterday.

Half of the US$2 billion in seed capital raised among the participating banks will be allocated to the Pan-Asian Fund, which will be domiciled in Singapore and subject to regulatory approvals listed in Hong Kong.

Hon Cheung, managing director at SSgA Singapore, said yesterday the PAIF would be the 'first low-cost passively managed bond fund available in Asia'.

With a projected expense ratio of just 0.25 per cent, exposure to 'interesting and exotic markets' including China and an index on a projected net yield of about 3.6 per cent to 3.8 per cent, the fund was likely to prove attractive to institutional and retail investors, he said.

Hongkong and Shanghai Banking Corp, Hong Kong-incorporated subsidiary of HSBC Holdings, was appointed master custodian of the PAIF and eight single-market funds that will also be set up under the ABF2 initiative. HSBC Investments (Hong Kong) will also manage the ABF Hong Kong Bond Index Fund.

'We will be tracking a Hong Kong bond index and our aim will be to deliver a steady running yield for investors,' said King Au, head of institutional and private clients for HSBC Investment.

The running yield on the Hong Kong Bond Index was about 3 per cent, he said, and the average duration was 'somewhere between three and four years'.

To keep a lid on the costs of managing the ABF2 funds and provide investors with a regionwide bond performance benchmark, all of the funds under the initiative will be passively managed to replicate bond portfolios assembled by independent index supplier IIC (International Index Co), according to Ms Leung.

'There are eight local currency indices for each of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, as well as a separate Pan-Asia index,' David Mark, chief executive of IIC, said yesterday.

'The indices include sovereign and quasi-sovereign local currency debts in each economy, and they are constructed using the same principles of objectivity, transparency and multiple-contributor pricing as other [investment grade fixed-income issues] iBoxx indices,' he added.

Market weights in the Pan-Asia index will be reviewed annually and are derived from a combination of factors, including market size, liquidity and openness. Market weights announced yesterday were: China, 11.28 per cent; Hong Kong, 17.05 per cent; Indonesia, 6.14 per cent; Korea, 21.26 per cent; Malaysia, 10.76 per cent; Philippines, 5.19 per cent; Singapore, 18.7 per cent and Thailand, 9.62 per cent.

Allocations to the single country funds will broadly follow their market weightings in the Pan Asian Fund, Ms Leung said.