P2 Paul Hsueh

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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
   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
 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
      US Treasury/Corp. Bond Yields

10%
      Widening and narrowing credit
      spread through the crisis period
8%

      10-yr IG
6%


4% 10-yr Treasury


2%


0%
 2006/11   2007/4   2007/9   2008/2   2008/7   2008/12   2009/5   2009/10
      Taiwan Treasury/Corp. Bond Yields

10%


8%


6%


4%


2%
                 Relatively stable credit
0%            spread throughout the crisis
 2006/11   2007/4   2007/9   2008/2   2008/7   2008/12   2009/5   2009/10
             US Bond Market
             Issuance Volume
                                                   in $US billions
1600

1400
1200
            Corp.
1000
800
800
600
600                        T-bond
400
400                                 Significant increase
200
200
                                    in T-bond issuance
                                    following the crisis
  0
  0
   2004
   2004   2005
          2005      2006
                    2006       2007
                               2007         2008
                                            2008           2009/3
                                                           2009/3
             Taiwan Bond Market
              Issuance Volume
                                                    in $NT billions
600
         T-bond            Relatively stable T-bond issuance
500

400

300

200

100
                   Corp.

 0
  2004      2005           2006      2007        2008          2009
              Daily Trading Volume
               in US Bond Market
                                                     in $US billions
700                                                              40

600
         T-bond
                                                                 30
500
                               Not significantly
400
                            affected by the Crisis               20
300

200                                                  Corp.       10
100

  0                                                              0
  2004        2005   2006        2007        2008           2009/3
             Daily Trading Volume
            in Taiwan Bond Market
                                                in $NT billions
600                                                          20
         T-bond      Volume dropped long                    18
500
                    before the Crisis began                 16
                                                            14
400
                                                            12
300                                                         10
                                                            8
200                                                         6

100                                                         4
                                                            2
  0                                               Corp.     0
  2004       2005   2006      2007       2008          2009/3
Problems Facing Taiwan Bond Market
 Monopolistic T-bond investors
 Disappearing bond mutual fund
 Malfunctioning bond futures market
            Holding Concentration of
          5-year OTR T-bond in Taiwan
100%


80%


60%


40%               Top 3 investors hold over 60%
                  of on-the-run government bonds
20%


 0%
       2008/11   2009/2      2009/5       2009/8   2009/11
            Holding Concentration of
         10-year OTR T-bond in Taiwan
100%

80%

60%

40%               Top 3 investors hold over 80%
                  of on-the-run government bonds
20%

 0%
       2008/11   2009/2      2009/5       2009/8   2009/11
   Monopolistic T-bond investors
 Deterrent to other bond investors
 Unreasonable special repo rate
 Threat of short squeeze for bond futures
  sellers
  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
          Trends in Bond Fund Investing
                     in the US
4000                                               in $US billions


                                     Money Market Funds
3000
           Financial crisis attracts more
              money into bond funds
2000


1000
                                   Bond Funds
  0
   2004         2005        2006        2007      2008         2009
       Trends in Bond Fund Investing
                 in Taiwan       in $NT billions
3000
3000                                                             600
           Money Market/Bond Funds
2500
2500                                                  Separation 500
                                      Trading        of M.M. fund
2000
2000                                    volume                   400
                                                    and Bond fund
                                                     < 1% are in
1500
1500                                                 bond funds 300

1000
1000                                                             200

500
500
                   Bond funds play a vital                       100
                  role in secondary market
  0
  0                     trading activity                         0
   2001
   2001   2002
          2002   2003
                 2003   2004
                        2004   2005
                               2005   2006
                                      2006   2007     2008
                                                      2008   2009
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
       Trading Volume and Open Interest
          of T-bond Futures in Taiwan
No. of Contracts
2000
2000                                                              300

                   Dominated by far-month                         250
1600
1600               contracts and day trade    Trading
                                              Volume              200
1200
1200
                                                                  150
 800
 800
                                                                  100

 400
 400                                           Not used for
                                                                  50
                                             hedging purpose
   0
   0                                                              0
    2005
   2005             2006
                    2006         2007
                                 2007           2008
                                                2008           2009
                                                               2009
             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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