SPDR ETFs Prime Talk Series Kevin Anderson

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Improving Access to Asian Bonds With a Taste of Dim Sum

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Asian Markets
East Asia ex-Japan represents US$ 8.9 trillion in terms of GDP or about 15% of the world economy. Its bond market is US$ 5.7 trillion in size, 8% of the world total.
Korea GDP: US$ 1,116 billion Bond Market Size: US$ 1,229 billion China GDP: US$ 7,298 billion Bond Market Size: US$ 3,392 billion Thailand GDP: US$ 346 billion Bond Market Size: US$ 225 billion Malaysia GDP: US$ 279 billion Bond Market Size: US$ 263 billion Singapore GDP: US$ 260 billion Bond Market Size: US$ 189 billion Hong Kong GDP: US$ 243 billion Bond Market Size: US$ 169 billion

Philippines GDP: US$ 213 billion Bond Market Size: US$ 77 billion

Indonesia GDP: US$ 846 billion Bond Market Size: US$ 110 billion

Data as of end-2011 Source: International Monetary Fund, World Economic Outlook Database, AsianBondsOnline (Asian Development Bank). World total bonds based on Bank for International Settlements total domestic debt securities outstanding. p. 3

Robust Fundamentals Strong Growth Trends in Asia

Buoyed by favorable demographics, strengthening domestic demand and increased global competitiveness, Asian economies are exhibiting better growth trends while more developed nations have shown signs of contraction.
Strong Real GDP Growth in Asia (%)
15 IMF Forecasts 10

-5 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 ASEAN-5

2014

2015

2016

2017

G-7 Economies

European Union

Newly industrialized Asia

China

Source: International Monetary Fund, World Economic Outlook Database, April 2012 (estimates starts 2012) ASEAN-5 : Indonesia, Malaysia, the Philippines, Singapore and Thailand. Newly industrialized Asia: Hong Kong, Korea, Singapore and Taiwan. The information contained above is for illustrative purposes only.

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Growing Contrast with Some of the Large Developed Countries Shifting Fundamentals
Deteriorating fiscal positions among developed markets draw focus to Asian sovereigns where there is greater fiscal stability. Sound policies and prudent fiscal spending have positioned Asian economies well, relative to highly indebted developed nations.
Fiscal deficits as percent of GDP favor Asian economies
10 5 0 Hong Kong Indonesia Philippines -5 United Kingdom United States Spain -10 Ireland -15 -20 -25 Malaysia France Germany Singapore Thailand China Korea

Source: Bloomberg, as of 2011 (except China 2010) The information contained above is for illustrative purposes only..

Greece

Japan

Portugal

Italy

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International Reserve Assets and Current Account Balance

High international reserves and current account surpluses provide Asian countries with the ability to manage volatile international flows amidst challenging external conditions, providing support for Asian currencies.
International Reserve Assets (USD Billions)
3'500 3'000 2'500 2'000 1'500 1'000 500 0 Indonesia Malaysia China South Korea Hong Kong
238

Current Account Balance (USD Billions)

250 201

3'240

200

150

100 57 50
112

295

29 107

312
112 31

130

17 76

80

243
36

165 0

17

27
10 10 7

32
7 -2

11

12

Indonesia

Malaysia

Philippines

-50

June 2002

June 2012

2001

South Korea

Singapore

Hong Kong

2011

Source: Bloomberg. Source: International Monetary Fund, World Economic Outlook Database (April 2012) The information contained above is for illustrative purposes only.

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Philippines

Thailand

Singapore

Thailand

China

Stable and Improved Credit Ratings Stable and Improved Credit Ratings during the last 5 years
Credit ratings of Asian sovereigns has been generally stable or improving since recovering from the Asian crisis.
S&P Local Currency Long-Term Sovereign Debt Ratings
Country Singapore Hong Kong China South Korea Malaysia Thailand Indonesia Philippines Dec 1997 AAA AABBB+ BBBAA A BBB+ ADec 2002 AAA AABBB A+ A+ ABBBB+ Dec 2007 AAA AA A A+ A+ A BB+ BB+ July 2012 AAA AAA AAA+ A ABB+ BB+

Source: Bloomberg.

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Growth of Asian Local Currency Bonds

Asian local currency bonds presents ability to participate in the Asian economic growth. Asian bonds have more than doubled in size to over US$5 trillion in the past five years.
Asia ex-Japan* Outstanding Local Currency Debt Securities, USD Billions
6'000

5'000

4'000

3'000

2'000

1'000

1995 1996 1997 1998 1999 2000 2001 2002 Government 2003 2004 2005 2006 Corporate 2007 2008 2009 2010 2011 Mar 2012

*Asia ex-Japan includes China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam. Sources: AsianBondsOnline, ADB p. 8 The information contained above is for illustrative purposes only.

Improving Liquidity Trading Volume of Asian bond markets in USD Billions

20'000 18'000 16'000 14'000 12'000 10'000 8'000 6'000 4'000 2'000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China Hong Kong Korea 400 300 200 100 0 2001 2002 2003 2004 2005 2006 Singapore 2007 2008 Thailand 2009 2010 2011 600 500

Indonesia

Malaysia

Philippines

Source: AsianBondsOnline (Asian Development Bank) The information contained above is for illustrative purposes only.

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Growing Investor Base A More Diversified Investor Base

Increasing participation of foreign investors has diversified the investor base and improved the liquidity of local currency bond markets.
40 35 30 25 Percent 20 15 10 5 0

Indonesia

Korea

Malaysia

Thailand

Sources: AsianBondsOnline, Asian Development Bank. June 2012. The information contained above is for illustrative purposes only.

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Established Benchmark Transparency

Asian markets are well established markets and some are included in global bond benchmarks.
Inclusion Dates into Global Bond Benchmarks
Global Market Indices Country Singapore Hong Kong China South Korea Malaysia Thailand Citi World Govt Bond Index Jan 2005 Jul 2007 Barclays Capital Global Treasury Index Jan 2002 Sept 2004 Jan 2002 Jan 2006 Jul 2008 * JP Morgan Govt Bond Index - Broad Apr 2001 Jan 2003 Dec 2001 Emerging Markets (EM) Indices Barclays Capital Global EM Bond Index June 2008 June 2008 June 2008 JP Morgan GBI EM Index Jan 2004 June 2002 June 2002

Indonesia Philippines

June 2008 June 2008

Jan 2002

Oct 2010

* Thailand was included in Jan 2002, but was excluded in March 2007. It was added back in July 2008. Source: Citigroup, Barclays Capital, JP Morgan.

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Higher Yields on Offer in Asia Relative to Developed World Relatively Higher Yield Versus Developed Markets
Yield (%) 7 Indonesia 6 Philippines

5 Malaysia China Thailand US Germany Singapore 2 Japan

Korea

Hong Kong

0
-1

10

15
Maturity (years)

20

25

30

Source: Bloomberg As of 15 August 2012 The information contained above is for illustrative purposes only.

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Return-Risk Performance Asian local currency government bonds have performed better relative to most developed bond markets.
Risk-Return Performance in the last 7 years August 2005 July 2012; in CHF Unhedged terms
15% Indonesia Govt Bonds

Annualized Returns

10%

5% Swiss Govt Bonds

Singapore Govt Bonds Pan-Asia Govt Bonds World Govt Bonds US Govt Bonds Euro Govt Bonds Spain Govt Bonds

0%

-5% 0% 5% 10% Annualized Volatility 15% 20% 25%

Source: SSgA calculations, Markit iBoxx (for Asian bonds), Citigroup for other bond indices, Bloomberg for CHF exchange rates. p. 13 The information contained above is for illustrative purposes only.

Diversification Benefits Relatively lower correlations provides better diversification.

3-Year Rolling Correlations Versus Swiss Government Bonds In CHF Unhedged terms
0.8

0.6

Correlation vs. Swiss Govt Bonds

0.4

0.2

0.0

-0.2

-0.4 Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Pan-Asia Local Currency Govt Bonds

World Govt Bonds

US Govt Bonds

Euro Govt Bonds

Source: SSgA calculations, Markit iBoxx, (for Asian bonds), Citigroup for other bond indices, Bloomberg for CHF exchange rates. p. 14 The information contained above is for illustrative purposes only.

Asian Government Bond Index Characteristics and Country Exposure The Citi Asian Government Bond Investable Index provides a diversified exposure to Asian markets investable to foreign investors, including offshore Chinese bonds Dim Sum Bonds.
Citi Asian Government Bond Investable Index Market Allocation (%) As of 31 July 2012
Number of Issues Market Value (in USD Bn) Modified Duration (%) Yield to Maturity (%) Coupon (%)
China 1.5% Hong Kong 2.7% Indonesia 16.2%

Citi Asian Government Bond Investable Index

195 624 6.1 3.4 5.1
Singapore 13.6%

Thailand 17.9%

Korea 20.0% Philippines 9.2%

Malaysia 18.9%
Source: Citigroup, as of 31 July 2012. p. 15

Data is as of the date indicated, is subject to change and should not be relied upon as current thereafter. Sources: Citigroup, SSgA.

Accessing Chinese Government Bonds

The Chinese Renminbi (RMB) bond market is large with a size of about US$ 3.4 trillion.* Investors are keen to gain exposure into this market given better yields as well as potential for currency gains. Historically, the Chinese bond market has been inaccessible to most non-local institutional investors. Only approved foreign institutional investors can access the onshore bond market. The introduction of the offshore RMB or CNH market allowed non-local institutional investors access to RMB-denominated Chinese government bonds that trade in Hong Kong. The Chinese government issued their first offshore RMB bond in September 2007 and has been issuing regularly since 2011. This offshore, RMB-denominated bond market is known as the dim sum market. The market is small, but it is expected to grow rapidly. The Citi Asian Government Bond Investable Index covers this market, meaning an investment with exposure to the Citi Asia Local Government Bond Index gains access to this growing segment of the Asian government bond market.

* Source: AsianBondsOnline

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Accessing Chinese Government Bonds - Dim Sum Bonds

The offshore Renminbi (CNH) market is almost RMB 925 billion (US$ 145 billion) that has rapidly grown since 2010. Most of the CNH assets are still in cash deposits, but as the bond market develops, an increasing portion is invested in bonds. The CNH bond market (also known as Dim Sum bonds) is currently about RMB 230 billion (US$ 36 billion) and is small when compared to the size of the onshore Renminbi bond market which is about RMB 22 trillion (US$ 3.4 trillion).
Outstanding Offshore Renminbi (CNH) Assets in Hong Kong (in RMB Billions)
900 800 700 600 500 400 300 200 100 -

Deposits

Certificate of Deposits

Bonds

Source: HKMA, HSBC The information contained above is for illustrative purposes only.

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China Government Yields

CNH bond yields are lower than onshore yields given higher demand relative to supply. This premium has been declining as the Chinese government issues more bonds and as the regulatory environment improves.
% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0 5 10 China Sovereign (Onshore) Maturity (years)
Source: Bloomberg, as of 14 August 2012 The information contained above is for illustrative purposes only. p. 18

15

20 China Sovereign (CNH Offshore)

25

30

Biographies

Kevin D. Anderson, PhD

Kevin is a Senior Managing Director of SSgA and Global CIO of Fixed Income and Currency. He is responsible for all fixed income and currency strategies and products as well as extending SSgA's leadership position in innovative solutions based mandates for example those created for liability driven investors. Prior to commencing his current role, Kevin was the Global Head of Fixed Income Beta Solutions. In this role, Kevin had responsibility for SSgA's global range of indexed fixed income strategies, beta solutions such as fixed income liability matching mandates and other fixed income synthetic beta replication strategies. When Kevin joined SSgA in 2001, he was an investment manager, managing both active and index fixed income portfolios. He also worked extensively in the area of risk budgeting during that time. Before joining, Kevin was responsible for fixed income risk management and development of quantitative strategies at Schroders, having joined the industry in 1998. Kevin holds a PhD in Theoretical Physics from the University of Southampton and he graduated with a BSc Honours degree in Mathematical Physics from the University of Edinburgh in 1994.

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