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Strategies for Improving the Primary and Secondary Bond Markets in Taiwan Paul Hsueh Professor of Finance National Chung Cheng University 11/20/2009. Presentation Outline. Session Topic Strategies for prospering the primary and secondary bond markets Focus of my presentation

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Presentation Outline

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  1. Strategies for Improving the Primary and Secondary Bond Markets in TaiwanPaul HsuehProfessor of FinanceNational Chung Cheng University11/20/2009

  2. Presentation Outline • Session Topic • Strategies for prospering the primary and secondary bond markets • Focus of my presentation • Taiwan bond market had the highest bond trading turnover in Asia (ex. Japan), but the trading activity has declined significantly in recent years • Highlight the problems in the market and provide suggestions for improving the current situation

  3. Impact of Global Financial Crisis • Credit squeeze • Mortgages, junk bonds,…. • Fire sales of risky bonds and flocking to government bonds • flight to quality • Liquidity squeeze • Higher-grade corporate bonds, Structured notes, Auction-rate securities, …….. • flight to liquidity

  4. US Treasury/Corp. Bond Yields Widening and narrowing credit spread through the crisis period 10-yr IG 10-yr Treasury

  5. Taiwan Treasury/Corp. Bond Yields Relatively stable credit spread throughout the crisis

  6. US Bond Market Issuance Volume in $US billions Corp. T-bond Significant increase in T-bond issuance following the crisis

  7. Taiwan Bond Market Issuance Volume in $NT billions Relatively stable T-bond issuance T-bond Corp.

  8. Daily Trading Volumein US Bond Market in $US billions T-bond Not significantly affected by the Crisis Corp.

  9. Daily Trading Volumein Taiwan Bond Market in $NT billions T-bond Volume dropped long before the Crisis began Corp.

  10. Problems Facing Taiwan Bond Market • Monopolistic T-bond investors • Disappearing bond mutual fund • Malfunctioning bond futures market

  11. Holding Concentration of 5-year OTR T-bond in Taiwan Top 3 investors hold over 60% of on-the-run government bonds

  12. Holding Concentration of 10-year OTR T-bond in Taiwan Top 3 investors hold over 80% of on-the-run government bonds

  13. Monopolistic T-bond investors • Deterrent to other bond investors • Unreasonable special repo rate • Threat of short squeeze for bond futures sellers

  14. Shrinking Bond Mutual Fund • Important institutional investor in the bond market • Major player in the early development of Taiwan bond market • Decreasing bond fund assets in recent years

  15. Trends in Bond Fund Investing in the US in $US billions Money Market Funds Financial crisis attracts more money into bond funds Bond Funds

  16. Trends in Bond Fund Investingin Taiwan in $NT billions Money Market/Bond Funds Separation of M.M. fund and Bond fund Trading volume < 1% are in bond funds Bond funds play a vital role in secondary market trading activity

  17. Malfunctioning Bond Futures Market • Bond futures facilitates cash market trading and offers a vital hedging function • Taiwan’s T-bond futures started in 2004 but only with sluggish activities • Physical delivery is hampered by the illiquidity of deliverable bonds

  18. Trading Volume and Open Interest of T-bond Futures in Taiwan No. of Contracts Dominated by far-month contracts and day trade Trading Volume Not used for hedging purpose

  19. Conclusions • Taiwan bond market is facing serious problems and global financial crisis is not the cause • Position limits on OTR T-bond holdings • Tax incentives for bond mutual funds • Cash delivery of T-bond futures

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