“The ‘What Moves the Bond Markets?’ course has a very consultative approach to it. Participants are able to leverage theoretical and practical experience of the faculty and other course participants on pressing issues of the day related to emerging world bond markets, and use that experience to make an impact in their organizations.”- Prof. Eli Remolona

Bond markets are extremely important to central banks. Yet it’s hard to find opportunities to learn what drives these bond markets in typical finance or MBA programs. Regulators, central bankers and finance professionals must often learn on the job through peers and seniors within the space, as academic institutions and business schools aren’t teaching these highly-specialized subjects, nor publishing textbooks on the subject.

To bridge this gap between academic theory and central banking practice, The Asia School of Business (ASB) Iclif Executive Education Center has recently starting delivering open-enrollment as well as more niche custom-built courses on the topic of what moves bond markets. These courses were developed as a result of engaging with the ASEAN and emerging market central banking and finance community.

Understanding how bond markets function is critical for central bankers in emerging markets. This is to ensure the success of their bond markets as a stable and reliable source of long-term financing for the country’s growth. For instance, one of the topics taught at ASB by Professor of Finance and Director of Central Banking at the Asia School of Business (ASB), Eli Remolona, is that of the size and liquidity of bond markets.

Research conducted by Prof. Remolona while he was working at the Bank for International Settlements found that based on the success of government bond markets in G10 markets, bond markets need to be at least USD$200 billion in size to be liquid and sustainable. The implication for bond markets in Asia and emerging countries is that they could be limited by the size of outstanding central government debt.

Bringing together a wealth of knowledge for the first time in emerging markets

Prof. Remolona’s credentials for teaching on the subject are certainly impressive. He spent 14 years of his career at the Federal Reserve Bank of New York and 19 years at the Bank for International Settlements in Basel and Hong Kong. He has also taught at Williams College, Columbia University, New York University and the School of Economics of the University of the Philippines, and holds a PhD in economics from Stanford University.

“At the Fed, my main job was financial markets, including bond markets. Over the years, I’ve given seminars and written papers explaining bits and pieces of how bond markets work,” said Prof. Remolona. “This course that we custom-built for the central banks in the ASEAN region and emerging markets puts all these different bits of knowledge together for the first time in a very comprehensive way.”

“What would previously take you years to learn from different sources while on the job – you can now get a good overview of in a few days. This is why I’m not only excited about this series of courses on the bond markets, but also about the wider Central Banking Initiatives at ASB and Master of Central Banking program, launched jointly by Bank Negara Malaysia and MIT Sloan School of Management, with the first intake commencing in June 2021,” he added.

The course “What Moves the Bond Markets?” brings together and applies three separate strands of the literature to offer practical guidance for investments in sovereign bond markets:

1. First, it covers the impact of the most important information events in the bond market, such as the little-understood central bank forward guidance, the US nonfarm payroll announcements and China’s PMI releases.
2. Second, it examines the dynamics of the yield curve and how it responds to these information events and reflects revised market expectations of future short rates and the reactions of term premia at different maturities.
3. Third, it looks at regularities in the way global bond markets behave, including the role of benchmark portfolios, the pricing of sovereign risk and episodes of market stress.

To reinforce participants’ understanding, exercises are performed using actual data, including data on participants’ local government securities. These exercises are supervised by Prof. Triwit Ariyathugun, Assistant Professor of Economics who holds a PhD from the University of Chicago.

When economists meet traders

“Within a central bank, economists – the technical experts who understand the theoretical and mathematical underpinnings of topics like sovereign bond markets – don’t always interface closely with the traders, who understand more intuitively how the markets move,” explained Prof. Remolona. “Because we observed that economists and traders don’t often interact with each other in the central bank, we deliberately chose to mix up the participants for group-based activities.”

“The ‘What Moves the Bond Markets?’ course has a very consultative approach to it. Participants are able to leverage theoretical and practical experience of the faculty and other course participants on pressing issues of the day related to emerging world bond markets, and use that experience to make an impact in their organizations.” This consultative, application-based approach extends beyond the classroom as well.

Following on from this trailblazing course, Prof. Remolona continues to partner with central banks in Asia and emerging economies, working with them on projects such as populating the yield curve using local data. “So far, I’ve been pleasantly surprised by the sophistication and aspiration of the participants for cultivating bond markets in the region,” concluded Prof. Remolona. “They had a good level of understanding and asked very insightful questions.”

Deepening central bankers’ knowledge of bond markets

The feedback of course participants to date speak for themselves, as testament to Prof. Remolona’s deep wealth of knowledge and expertise:

One Deputy Director of a regional central bank said, “The course is very well-paced and greatly facilitated understanding. It also provides a good foundation for understanding the bond market, which I was not very familiar with. This course has opened up possible research areas that we can look into, such as estimating the yield curve for other nations, what are the factors that move it, and how it connects to the to the macro side.”

Another bank manager said, “Since we’re always in the market, our perspective is more on the market side, not from the academic side of things. This course is actually a good link between what is the theory, and what empirical studies have been done. I think it’s very useful to have most people in the central bank go through this course, regardless of the technicality of the person.”

What Moves the Bond Markets?