19 April 2019

What is FTSE World Government Bond Index (WGBI) ???

On Monday, global stock market indices provider FTSE Russell placed Malaysia's market accessibility level in its World Government Bond Index under a review considering a downgrade from the current level of 2 (highest level of accessibility) to 1, due to concerns about market liquidity, at the end of the review period in September.

The downgrade may make the Malaysian local government ineligible for the index that helps with exposure to wider global investors. (Source: TheEdge Market news)

Double Drops !!!

Following the release of the news, Malaysian Ringgit and FBM KLCI tumbles the next day due to heavy foreign selling. USD/MYR hitting a low of 4.14 at the time of writing and seems that it will continue to falls further, if Bank Negara Malaysia decided to lower down the benchmark interest rate (OPR) in coming months.

While investors scramble to react from the news, what is this WGBI actually?

Let us have some understanding and let's get the class started below...

The World Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently comprises sovereign debt from over 20 countries, denominated in a variety of currencies, and has more than 30 years of history available.

Malaysia Government Bond 10Y

The WGBI is a broad benchmark providing exposure to the global sovereign fixed income market. Fixed rate coupon bond/securities with at least one year maturity. (Source: The Yield Book by FTSE Rusell)

Which Countries were inside the List now ?

  1. Canada
  2. Mexico
  3. United States
  4. Austria
  5. Belgium
  6. Finland
  7. France
  8. Germany
  9. Ireland
  10. Italy
  11. Netherlands
  12. Spain
  13. Denmark
  14. Norway
  15. Poland
  16. Sweden
  17. Switzerland
  18. United Kingdom
  19. South Africa
  20. Australia
  21. Japan
  22. Malaysia
  23. Singapore

What is the Market Size to enter / exit the index?

Entry: The outstanding amount of a market's eligible issues must total at least USD 50 billion, EUR 40 billion and JPY 5 trillion for the market to be considered eligible for inclusion.

Exit: When the outstanding amount of a market's eligible issues falls below half of all the entry-level market size criteria, namely USD 25 billion, EUR 20 billion and JPY 2.5 trillion, for three consecutive months, the market will be removed from the next month's profile and added to the WGBI Additional Markets Indices.

What is the Minimum Credit Quality needed?

Entry: A- by S&P and A3 by Moody's, for all new markets.
Exit: Below BBB- by S&P and Baa3 by Moody's.

(Note: Malaysia's current credit rating was A- by S&P, A3 by Moody's, A- by Fitch)

What is the Barriers-to-Entry?

Entry: A market being considered for inclusion should actively encourage foreign investor participation and show a commitment to its own policies.

Exit: Circumstances can change over time and a country may find that revising its policies makes sense for its national welfare. However, it is possible that new policies, including but not limited to ownership restrictions and capital controls, can have the effect of limiting investors' ability to replicate the returns of that country's portion of the index. In that case, it may be necessary to remove that country from the WGBI.

If barriers to entry are identified, an announcement will be made that the particular market has become ineligible, stating the reasons. That market will then be removed from the following month's profile and moved to the WGBI Additional Markets Indices.

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