Asian central bankers plan Asian Bond Fund Part 2

Asian central banks are planning a second phase for the Asian Bond Fund (ABF), paving the way for investments in local currency-denominated Asian bonds.

The structure of the ABF2 was approved by the Executives Meeting of East Asia and Pacific Central Banks (EMEAP) after the successful launch of the original $1-billion ABF.

Since its launch in June 2003, ABF1 is now fully invested in dollar-denominated bonds issued by sovereign and quasi-sovereign issuers in the EMEAP economies.

The Bangko Sentral ng Pilipinas (BSP) announced yesterday that EMEAP had recommended a preliminary framework for ABF2 consisting of two components.

BSP Governor Rafael Buenaventura said the ABF2 will include what will be called as Pan-Asian Bond Index Fund (PAIF) and Fund of Bond Funds (FoBF).

Buenaventura said the fund would be passively managed against a set of pre-determined benchmarks, covering local currency bonds issued by sovereign and quasi-sovereign issuers in EMEAP economies.

The EMEAP said in a statement that the second phase of the ABF is being designed to facilitate investment by other public and private sector investors.

The PAIF will be a single bond index fund investing in local currency denominated bonds in EMEAP economies.

"It will act as a convenient and cost effective investment fund for regional and international investors who wish to have a well-diversified exposure to bond markets in Asia," EMEAP said.

On the other hand, the FoBF is a two-layered structure with a parent fund investing in a number of country sub-funds comprising local currency denominated bonds issued in the respective EMEAP economies.

EMEAP said the FoBF country sub-funds are intended to provide local investors with low-cost and index-driven investment vehicles and at the same time give regional and international investors the flexibility to invest in the Asian bond markets of their choice.

In determining the size of ABF2, EMEAP said its members would limit the size of the total investment, so that it will not have a crowding out effect on private sector investors.

Individual EMEAP economies can leverage on the interest and momentum generated from the collective investment in ABF2 to further develop their domestic bond markets as appropriate.

In this connection, EMEAP said its members have agreed to work on improving market infrastructure by identifying and minimizing the legal, regulatory and tax hurdles in their markets, thereby facilitating the creation of fixed income products in the region.