Month: January 2017

With yesterday’s announcement by Bloomberg of the addition of bonds from the Chinese interbank bond market into a parallel index to the Bloomberg Barclays Global Aggregate Index, China’s bond market has been thrust into the limelight.

Why is this important?

China’s bond market has grown to become the 3rd largest in the world, with $9.4 trillion in outstanding debt. The RQFII program announced in 2011, and a scrapping of quotas for most institutional investors, announced last year, have gradually opened the market to foreign investors, yet due to capital controls, opaqueness, and difficulty in understanding the risks, foreigners still only hold around 2.5% of the market.

The inclusion of Chinese bonds in global indices will accelerate foreign inflows. With a parallel index institutional investors will still have a choice, rather than be mandated, whether or not to include Chinese bonds in their portfolios. But the move will increase awareness of the opportunities in the China market, and force investors to start exploring investment ideas. With yields significantly higher than other markets (e.g. China 10 year yield is 3.33% versus 2.52% in the US, 1.68% in HK, and 0.46% in Germany), and a currency 10% cheaper against the USD than 2 years ago, there is plenty to attract investors.

As new participants enter the market we are also likely to see a rapid increase in sophistication in how the market operates. Although only Government and Policy Bank Bonds will be included initially, inclusion of other bond types, such as  MTNs and Enterprise Bonds, will likely follow. Having a broader investor base will result in better pricing of credit, demand for higher rating standards, and introduction of additional credit analytics such as default probabilities and implied ratings.

BondIT provides investors with a platform that brings a digital approach to bond portfolio construction and management. Thanks to our strategic partnership with Wind Information we can support foreign investors who are investing in, or considering participating in, the onshore Chinese bond market.

 

Donald Chan, BondIT’s Head of Asia Pacific speaks to InvestHK on BondIT’s push into the Asia-Pacific region through Hong Kong. Click here to read the article on InvestHK’s website.

The fixed-income market is a complicated world to navigate. Bonds come with many different ratings, and some are not rated at all. They usually trade in the “over the counter” market instead of on exchanges. Adding in other factors such as interest rate sensitivity, duration and maturity and so on, and the task of creating an optimised fixed-income portfolio becomes daunting.

That was why it took a team of 25 experts three years to get BondIT, a digital algo-advisory solution for fixed-income investment, ready for commercialisation last year.

“We have people from the financial market with fixed-income knowledge, and those with data and machine-learning expertise; five of them are PhDs,” Donald Chan, Head of Asia Pacific, said. “The combination of know-how and the amount of lead time we have entered the market to generate this solution is precisely our competitive edge.”

BondIT has introduced the solution to its home country of Israel and to Europe, and it is now available in Asia as well. Given his in-depth understanding of the Asian markets and experience working with Israeli tech companies, Chan co-founded the Asia business with Hong Kong being chosen as its regional hub. Beyond Hong Kong, BondIT has successfully launched its business in Singapore, Korea, and now Mainland China.

“We have decided on Hong Kong because it is the financial hub of Asia, and it is one of the most developed and established fixed-income markets in the region. This city is also a wealth management hub, and then there is the ease of access to the Mainland Chinese market,” Chan explained.

The fixed-income market in Mainland China is rapidly developing, he furthered, and his company has formed a partnership with Wind Information, a leader in the country’s financial data services industry. He added that having a presence in Hong Kong played an important role in securing the pact.

“Hong Kong is one of the most forward-looking cities in Asia when it comes to FinTech. The Securities and Futures Commission and the Hong Kong Monetary Authority are being strategically involved in the whole ecosystem, to act as an enabler for FinTech,” he said.

“They are encouraging adoption and testing, and we are seeing a lot of other countries trying to play catch-up. We have an advantage of being at least a year or two ahead.”

Chan emphasised that BondIT is a B2B2C solution aiming to equip investment advisors and portfolio managers at financial institutions to manage the fixed-income universe more effectively. The solution “cleanses” the plethora of data for accuracy and concision, and then seeks out bonds based on an investor’s constraints and goals. What used to take analysts and financial professionals hours and days to do, often with sub-optimal results, can now be done in seconds, with more efficiency and precision.

“With our solution, it takes 15 seconds to construct a portfolio,” Chan said.

The efficiency allows the advisor to provide clients with timelier advice in response to the fast-changing market. The solution also sends out alerts when bonds in a portfolio are maturing or when weightings of assets in a portfolio need rebalancing.

From the financial institution’s perspective, Chan explained, the solution frees up time for advisors to reach out to “sleeping” clients and reactivate their accounts, and hence a wider outreach to clients. Recommendations are based on clearly defined risk parameters and analytics are well presented, which helps ensure regulatory compliance.

Heading BondIT’s Asia base in Hong Kong, Chan works with a chief revenue officer and a head of product management. He plans to add another 10 to the headcount in 2017 for functions such as front-end development, client support and marketing.