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Building bonds in a floating market

Floating-rate notes reign supreme in Asia. Whatever kind of product gets issued, the chances are it will be swapped back into FRNs ­ the favoured investment of the region's banks. They show no sign of changing their tastes and the successful development of fixed income will require a new class of investor. Brian Caplen reports on this and other challenges to the Asian bond market.

East Asia's bond markets may be set to grow to over $1 trillion by 2004, as the World Bank predicts. And they may be, as one analyst puts it, "the final frontier for the world's investment banks". But right now they are in a primitive condition.

A list of the difficulties of issuing and investing in them makes sober reading ­ antiquated settlement systems, short or non-existent yield curves, unfavourable tax treatment, poor liquidity and a lack of both supply and demand for paper.

Currently, the challenge for banks is to link up borrowers and investors and give both as smooth a ride as possible through often choppy seas. But to give the market what it wants, bankers must understand Asia's business background and why some products succeed while others stumble.

The plain-vanilla fixed-rate bond of medium or long maturity is something of a bit player in Asia. Governments tend to be flush with money and to run surpluses, and what issuance they do undertake is of the short-term money market kind. Traditionally, Asian corporates have relied on bank loans and equity for fund-raising and fought shy of the disclosure demanded by bond issues.

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