The ABF Pan Asia Bond Index Fund is a key component of the Asian Bond Fund 2 Initiative and it helps the development of bond markets in Asia, Monetary Authority Chief Executive Joseph Yam says.

He said the increased demand for bonds in Asia will result in more competitive pricing, making bonds more popular as an alternative means of financing to complement bank credits and equity financing.

The ABF Pan Asia Bond Index Fund (PAIF) was inaugurated this week and is the second listed bond fund under the Asian Bond Fund 2 Initiative (ABF2).

Mr Yam said there is no shortage of savings in Asia, with total foreign exchange reserves exceeding US$2 trillion. The savings are invested in low yielding financial instruments in the US and other G7 markets before being recycled back to Asia.

Effective intermediation

"This is a reflection of the underdevelopment of capital markets in Asia, which hinders effective intermediation between savings and investments. A deep and broad bond market would play an important part in overcoming this structural defect."

He said there is a need to improve the availability of domestic-currency fixed-income products in Asia and increase the accessibility of these products to investors.

The PAIF might help to meet these objectives. It is a convenient and low-cost product that will facilitate investor participation. The PAIF also encourages cross-border investment in fixed-income instruments. It will help the pooling of savings for investment in domestic currency bonds.

The PAIF is the first foreign institutional investor to have access to the interbank bond market in the Mainland. And Thailand and Malaysia have provided withholding tax exemptions to foreign investors investing in local currency bonds.

Mr Yam said investors should consider all risks before investing in these funds. The trading price of the PAIF may rise or fall according to the demand and supply of the market, while the net asset value of the funds may fluctuate with price movements.