Dynamics of Bond Market Integration in ASEAN-5

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1 Preliminary, do not quote without permission of authors Dynamics of Bond Market Integration in ASEAN-5 Doulos Lee and Nesha Armo Third Annual Bank Negara Malaysia Economics Research Workshop 9 November 2015

2 The views expressed here are those of the authors and do not reflect those of Bank Negara Malaysia or any other organisation

3 Local Currency Bond Markets have grown significantly over the past two decades 9000 Growth of Asian Local Currency Bond Markets (ex Japan) Size (USD billion) Dec-00 Dec-02 Dec-04 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Time Government bonds Corporate bonds Source: ADB Bonds Online 3

4 Growth spurred by regional cooperation and collaboration among policymakers Snapshot of key regional initiatives ASEAN Working Committee on Capital Market Development (WC-CMD) ASEAN+3 Asian Bond Market Initiative (ABMI) Executives Meeting of East Asia Pacific Central Banks (EMEAP) Key Focus Areas/ Strategies Enhancing capital market linkages Enhancing market access and liquidity Stregthening ASEAN s profile as an asset class To develop local currency denominated market To develop more accessible and well functioning regional bond markets both for issuers and investors Deepen and broaden the bond markets to promote the efficiency of financial intermediation in the region, catalyse market and regulatory reforms at both regional and domestic levels Key initiatives Bond Market Development Scorecard Credit Guarantee Inv. Facilty Asian Bonds Online Asia Bond Monitor Asian Bond Market Forum Regional Settlement Intermediary Asian Bond Fund 2 Pan Asian Bond Index Fund Single market funds Dynamics of Bond Market Integration in ASEAN-5 Economies Source: ASEAN, ABMI, EMEAP 4

5 Why develop local currency bond markets? Financial stability - spare tyre Improve availability of long term finance Motivation for developing LCY bond markets Financial deepening Improve local firms access to financing Supports conduct of monetary policy Source: Laeven,

6 In ASEAN, bond market development is a means to an end: financial integration to support the realisation of an ASEAN Economic Community Source: BNM press release 6

7 Mixed views on the state of financial integration in Asia Sources of portfolio investment % of total portfolio investment to and from Asia Less integrated than Europe but more integrated than Latin America (IMF, 2015; Poenisch, 2014) Asia more integrated with countries outside the region. Integration limited although integration has increased over the years, including in the bond markets. More integrated in the real sector (Spiegel, 2009; IMF, 2011;Kim, Lee & Shin, 2006). Integration of equity markets more integrated than bond markets (Fung, Tam, & Yu, 2010) Efforts by policymakers to develop bond markets have been productive (Chan, Chui, Packer & Remolona, 2012) Source: IMF 7

8 So what is the state of play of bond market integration in ASEAN-5? Key questions What is the level of integration among the ASEAN-5 bond markets? Can we observe any differences pre and post Global Financial Crisis? Method Cointegration tests Causality tests Data The dataset includes weekly yields for ASEAN-5 local currency government benchmark for 2 year and 10 year bonds obtained from Bloomberg Sample is for 496 weeks that begins in the week ending 1 July 2005 until 26 December 2014 Dickey Fuller (ADF) test was applied to test for non-stationarity of the data and unit root can be observed for all 10 benchmark bond series 8

9 At the outset, ASEAN-5 bonds seem to be significantly correlated with each other - 2 year 18 IN2y MY2y PH2y SG2y TH2y 2 year Indonesia Malaysia Philippines Singapore Thailand 13.5 Indonesia * 0.84* 0.62* 0.41* Yields 9 Malaysia * 0.65* 0.78* 4.5 Philippines * 0.55* Singapore * 0 7/1/200505/19/064/6/ /22/081/9/200911/27/09 10/15/10 9/2/201107/20/126/7/201304/25/14 Week 9

10 At the outset, ASEAN-5 bonds seem to be significantly correlated with each other - 10 year 18 IN10y MY10y PH10y SG10y TH10y 10 year Indonesia Malaysia Philippines Singapore Thailand 13.5 Indonesia * 0.81* 0.73* 0.65* Yield 9 Malaysia * 0.70* 0.55* Philippines * 0.62* 4.5 Singapore * 0 7/1/200505/19/06 4/6/200702/22/08 1/9/ /27/09 10/15/10 9/2/201107/20/12 6/7/ /25/14 Week 10

11 1. Big picture analysis However, simple correlation may overstate the extent and degree of integration TH 2 year PH 2 year Using Johansen (1991) trace method to find cointegration vectors MY 2 year Cointegration between TH and PH for 2 year bond SG 10 year MY 10 year Cointegration between MY and TH to SG for the 10 year bond TH 10 year Indicates MY and SG closely linked (2 and 10 year significant) 11

12 2. Pre vs post global financial crisis Most of these relationships seem to have taken significance only post-gfc TH 2 year SIGNIFICANT PRE AND POST GFC PH 2 year Using Johansen (1991) trace method to find cointegration vectors SG 10 year ONLY SIGNIFICANT POST GFC ONLY SIGNIFICANT POST GFC MY 2 year MY 10 year Divide sample into pre and post GFC Trace statistics show significant increase in cointegration vectors post- GFC especially for 10 year ONLY SIGNIFICANT POST GFC TH 10 year ONLY SIGNIFICANT POST GFC Taking previous results, except for TH and PH, cointegration seem to be significant only post-gfc Future work: Examine other pairs to determine if there are any changes 12

13 3. ASEAN-5 and United States Lack of relationship between ASEAN-5 and US bond markets US 2 year US 10 year SG 2 year SG 10 year US securities play a critical role, with significant spillovers to Asia and one of the main drivers of spreads (Bayoumi, T & Bui, T, 2012; Vivek, 2006) Overall, lack of evidence of cointegration between ASEAN-5 and US bonds Cointegration only significant between US and SG at both 2 and 10 year tenure 13

14 Discussion: Some preliminary thoughts on the key findings Policy driven initiatives to deepen bond markets Abundant global liquidity conditions Increased integration post- GFC can be potentially explained by two factors On lack of integration with US government bond markets Findings by Csonto & Ivaschenko (2013) suggest that US Fed Funds Rate and VIX is a better measure to proxy the movement of yields in the US Increased integration post-gfc On Singapore s close linkage within ASEAN-5 Consistent with rising of role of Singapore as financial centre in intermediating flows in the region 14

15 Way forward and policy implications for ASEAN-5 bond markets Financial integration can be further enhanced. Evidence of increased integration with further deepening possible and desirable Imperative for ASEAN-5 to actively continue to build capacity and the infrastructure to further develop its bond markets An efficient and integrated capital market remains a crucial bedrock for the development of an ASEAN Economic Community, financial stability and inclusive growth in ASEAN-5 There are challenges ahead, most notably the new landscape of financial services arising from global regulatory reforms. Such structural changes may present challenges for liquidity in bond markets and other unintended consequences (IMF, 2015) A concerted, prudent and flexibile approach is needed to further deepen financial integration 15

16 Thank you!

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