What is an Asian Bond Fund?

An Asian Bond Fund is a fund that consists of bonds issued by sovereign Asian entities. It was created by the Executives' Meeting of East Asia and Pacific Central Banks (EMEAP) to improve the Asian bond market. The first Asian Bond Fund initiative (ABF1) for issuing those bonds occurred in 2003, followed by a second initiative (ABF2) in 2005. The fund is managed by the Bank for International Settlements.

This type of bond fund gives Asian investors the opportunity to invest in financial assets that provide return benefits to the region. Some of these benefits include improved financial stability for EMEAP members and more efficient financial intermediation, in which the needs of lenders and borrowers are reconciled. The bonds can be bought directly by large investors, or they can be purchased by individuals though mutual funds.

The Asian bond market helps to finance the developing infrastructure in the region. The expansion of the Asian bond market reduces dependence on short term bank loans, which have historically caused economic failure in some Asian countries. Recently, however, sovereign Asian bond issuers have generally had a higher credit rating than other regions because of low political risk and strong economic support. As a result, most Asian bonds have a rating of investment grade.

ABF1 was launched in June 2003 using seed money of $1 billion US Dollars (USD) from the combined reserves of the 11 central banks that make up EMEAP. The seed money was invested in bonds issued by eight of the EMEAP members, and the bonds were issued in US dollars. The first Asian Bond Fund initiative allowed the EMEAP members to work together to build consumer trust and confidence in the organization.

ABF2 occurred in the spring of 2005. For the second initiative, $2 billion USD was invested in bonds of eight EMEAP members, but the bonds were issued in denominations of local currency instead of in US dollars as they were in ABF1. The investments that were part of the second initiative included nine Asian Bond Funds. All of the funds were passively managed index funds that used the International Index Company as the index provider. ABF2 was deemed necessary because the Asian bond market was still underdeveloped at that time.

Asian Bond Funds were created by the 11 central banks and monetary authorities in East Asia and the Pacific region that make up the EMEAP group. The countries with banks that are members of EMEAP are Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, and Thailand. The regional organization allowed the banks to work together to provide monetary resources to finance the Asian Bond Fund initiatives.