Intro

1. Intro Building Yield Curve for Asian Bond MarketsThe Challenges and the Road Ahead By Nitin Jaiswal Shanghai, May 2006 njaiswal@bloomberg.net

2. Contentpage 1 Presentation 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. Contentpage 1 Asian 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 impressive • Country 5 Yr Return Country 5 Yr Return • Indonesia 225% Philippines 87% • South Korea 88% India 75%

4. Contentpage 1 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. Contentpage 1 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. Contentpage 1 Evolution of a Developed Bond Market • Seven Steps towards a developed bond market: • Issuing of sovereign bonds • Development of money market benchmarks • Development of Yield Curve and valuation models • Issuance of corporate bonds • Development of related and hedging instruments • Development of Structured Products • 7. Introduction of Electronic Trading

7. Contentpage 1 Importance of Yield Curve For Asian Bond Markets • 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. Contentpage 1 Critical Success Factors for a Good Yield Curve • 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

9. Contentpage 1 Building Yield Curve for Asian Markets • Three major classification of curves • Money Market Curves • Government Bond Curve • Corporate Bond Curve

10. Contentpage 1 Money 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. Contentpage 1 Government 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. Contentpage 1 Government 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

13. Image page Yield Curve For Asian Markets on Bloomberg. APFM GO

14. Image page Yield Curve For Asian Markets on Bloomberg. GRAB GO

15. Contentpage 1 Govt. Bond Yield Curve - Challenges • Standardization • Commitment • Recognition • Distribution

16. Contentpage 1 Govt. Bond Yield Curve – Challenges (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. Contentpage 1 Govt. Bond Yield Curve – Challenges (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. Contentpage 1 Government 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. Contentpage 1 Building 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.

20. Image page Yield Curve Coverage for Asian Markets on Bloomberg. GRAB GO

21. Contentpage 1 Building Corporate Bond Yield Curve- Challenges • 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. Contentpage 1 Building Corporate Bond Yield Curve-Lacking 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. Contentpage 1 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. Contentpage 1 Building Corporate Bond Yield Curve- Next Steps • 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. Contentpage 1 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

26. Image page Valuation Projects in partnership with Fixed Income Market Association. GRAB GO

27. Contentpage 1 Concluding 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. • Awell 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

28. Contentpage 1 Building a Robust Asian Bond Markets • Your Thoughts • Your Ideas • Your Questions • Data source: IFM, IFC,ADB and Bloomberg