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

2. 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

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

4. 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 (1997-2009) 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 2009 4

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

6. Analysis of Factors Responsible for Term Structure Movements 6

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

8. 8

9. Observations Concerning U.S. Term Structure Movements 9

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

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

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

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

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

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

16. Analysis of Correlations Among Term Structure Movements 1 Significance of the Factor Correlations between the Major Developed Countries in Years 1997-2009 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

17. Analysis of Correlations Among Term Structure Movements 1 (Continued) Significance of the Factor Correlations between the Major Developed Countries in Years 1997-2009 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

18. Observations Concerning Recent Correlations 1 Significance of the Factor Correlations between the Major Developed Countries in Years 2006-2009 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

19. Observations Concerning Recent Correlations 1 (Continued) Significance of the Factor Correlations between the Major Developed Countries in Years 2006-2009 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

20. What Role Does International Trade Play? 1997-2000 2001-2005 2006-2009 CountryUSEUJapanOtherUSEUJapanOtherUSEUJapanOther Australia33--442-2313 Canada441--33-2121 France122-131--42- Germany-3--231-341- Italy121-241-34-- Sweden12---41-332- United Kingdom431---2-123- Switzerland121-242-233- Japan12-211-422-2 United States-413--22-332 20

21. Study Based on Seven Emerging Sovereign Debt Markets, 2006-2009 China India Indonesia Mexico Russia South Africa Turkey 21

22. Analysis of Factors Responsible for Term Structure Movements 22

23. Comparison between Developed and Emerging Sovereign Debt Markets 23

24. 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 2006-2009 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

25. What Role Does International Trade Play: Emerging Debt Markets? Number of Significant Correlations between Term Structure Factors in Years 2006-2009 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

26. 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