A Perspective on Global Fixed Income Market Integration John D. Finnerty Professor of Finance, Fordham University FIASI Hall of Fame Dinner April 14, 2011

Overview The integration of the global equity markets has been studied extensively. The integration of the global fixed income markets, especially the emerging debt markets, has received less attention. We are studying the integration of the fixed income markets at Fordham Business School, and I want to share some interesting preliminary results with you. 2

Study Based on Ten Well-Developed Fixed Income Markets Australia Canada France Germany Italy Japan Sweden Switzerland United Kingdom United States 3

Data Daily price and yield data Range of sovereign debt issues that span the term structure (average of 26 issues per developed country, and 14 per emerging country) 13 years of data ( ) Study daily movements in the term structure of interest rates Principal components analysis Study correlations of term structure movements across countries in the sample between 1997 and

Four Key Components of Term Structure Movements Level (parallel shifts) Slope (steepening/flattening) Curvature (butterfly) Oscillation (chiefly monetary policy effects) 5

Analysis of Factors Responsible for Term Structure Movements 6

Analysis of Factors Responsible for Term Structure Movements (Continued) 7

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Observations Concerning U.S. Term Structure Movements 9

Observations Concerning U.S. Term Structure Movements (Continued) 10

Analysis of Underlying Economic Factors Term Structure ComponentEconomic Factor LevelInflation SlopeEconomic Growth CurvatureEconomic Uncertainty OscillationVariability of Monetary Policy 11

Analysis of Underlying Economic Factors (Continued) Average Percentage Explained by Level Factor 12

Analysis of Underlying Economic Factors (Continued) Average Percentage Explained by Slope Factor 13

Analysis of Underlying Economic Factors (Continued) Average Percentage Explained by Curvature Factor 14

Analysis of Underlying Economic Factors (Continued) Average Percentage Explained by Oscillation Factor 15

Analysis of Correlations Among Term Structure Movements 1 Significance of the Factor Correlations between the Major Developed Countries in Years Level AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada0%----- France0% Germany0% Italy0% Japan0% Sweden0% Switzerland0% United Kingdom0% United States0% Slope AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada0%----- France0% Germany0% Italy0% Japan0% Sweden0% Switzerland0% United Kingdom0% 9%0% United States0% Significant at the 1% level. Significant at the 5% level. Significant at the 10% level. 1 Based on extended Nelson-Siegel model. 16

Analysis of Correlations Among Term Structure Movements 1 (Continued) Significance of the Factor Correlations between the Major Developed Countries in Years Curvature AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada72%----- France56%17%----- Germany0%38%0%----- Italy1% 18%3%----- Japan26%14%67%1%7%----- Sweden3%2%0% Switzerland61%0%84%0%56%0%51%----- United Kingdom21%3%12%23%0%9%44%38%----- United States81%0%43%71%49%10%15%77%70%----- Oscillation AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada0%----- France0% Germany32%50%5%----- Italy0% 8%----- Japan79%19%0%85%6%----- Sweden0% 46%0%82%----- Switzerland0% 47%0%6%0%----- United Kingdom0% 32%0%1%0% United States0% 12%0% Significant at the 1% level. Significant at the 5% level. Significant at the 10% level. 1 Based on extended Nelson-Siegel model. 17

Observations Concerning Recent Correlations 1 Significance of the Factor Correlations between the Major Developed Countries in Years Level AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada11%----- France0% Germany0% Italy0% Japan0%90%0% Sweden0%22%0% Switzerland0% United Kingdom23%0%1%0% 58%0%----- United States0%56%0% 20%0% 1%----- Slope AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada0%----- France0% Germany0% Italy0% Japan1% 0% Sweden0% Switzerland0% 1%0%----- United Kingdom0% United States0% 17%0% Significant at the 1% level. Significant at the 5% level. Significant at the 10% level. 1 Based on extended Nelson-Siegel model. 18

Observations Concerning Recent Correlations 1 (Continued) Significance of the Factor Correlations between the Major Developed Countries in Years Curvature AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada82%----- France86%54%----- Germany0%92%0%----- Italy0%57%78%1%----- Japan15%71%15%2%20%----- Sweden50%59%0%3%0%91%----- Switzerland0%24%48%1%0%14%0%----- United Kingdom20%82%37%6%97%6%60%25%----- United States10%2%68%78%11%13%0%5%1%----- Oscillation AustraliaCanadaFranceGermanyItalyJapanSwedenSwitzerland United Kingdom United States Australia----- Canada0%----- France0% Germany0% Italy0% Japan0% Sweden0% Switzerland0% United Kingdom0% United States0% Significant at the 1% level. Significant at the 5% level. Significant at the 10% level. 1 Based on extended Nelson-Siegel model. 19

What Role Does International Trade Play? CountryUSEUJapanOtherUSEUJapanOtherUSEUJapanOther Australia Canada France Germany Italy Sweden United Kingdom Switzerland Japan United States

Study Based on Seven Emerging Sovereign Debt Markets, China India Indonesia Mexico Russia South Africa Turkey 21

Analysis of Factors Responsible for Term Structure Movements 22

Comparison between Developed and Emerging Sovereign Debt Markets 23

Correlations between Developed and Emerging Sovereign Debt Markets 1 Significance of the Factor Correlations between the Emerging Markets and US, Germany, Japan, and China in Years LevelSlope USGermanyJapanChinaUSGermanyJapanChina 0% -----China0% Indonesia39%0% Indonesia2%0% India0% India3%0% Mexico28%65%0% Mexico0% South Africa0% South Africa0% Turkey99%0% Turkey0% CurvatureOscillation USGermanyJapanChinaUSGermanyJapanChina 51%58%0%-----China0% Indonesia67%93%78%60%Indonesia0% India88%62%8%0%India0% 28%0% Mexico52%37%69%66%Mexico0% 29%0% South Africa71%44%13%34%South Africa0% Turkey90%60%36%0% Turkey3%49%40%0% Significant at the 1% level. Significant at the 5% level. Significant at the 10% level. 1 Based on extended Nelson-Siegel model. 24

What Role Does International Trade Play: Emerging Debt Markets? Number of Significant Correlations between Term Structure Factors in Years SecondThirdFourthFifth Leading Trade Partner GermanyJapan China411-2INC (USA) India-1213INC1 (China)(Singapore) Indonesia11-111INC (Japan) (China) Mexico-13-2INC- (Canada)(Germany) (China) South Africa-1-23INC (Japan) (UK)(China) Turkey--32-INC- (China) 25

Conclusion Thank you for this wonderful award. Thank you for your attention. I look forward to seeing you at future FIASI events if I am invited to present additional results from this interesting research. 26