HK$ bonds offer compelling investment value against cash
Category: Asia, China, Hong Kong, Global, U.S.A.
Market positioning compared to Dim Sum bonds
While recent investor interest has been focussed on the offshore RMB (CNH) or Dim Sum bond market, the investment value of HK$ bonds should not be understated. “We certainly believe that the HK$ bond market will continue to retain its appeal to institutional and retail investors,” says Cecilia Chan, the chief investment officer of fixed income, Asia-Pacific at HSBC Global Asset Management.
There are three compelling reasons for this, she says. First, compared to Dim Sum bonds the yield curve of HK$ bonds is well established, with issuance’s maturities going up to 30 years. Liquidity, too, is generally better given the longer development history of the HK$ bond market. More importantly, the average credit quality is also generally higher.
According to figures from the Hong Kong Monetary Authority, the total issuance of Hong Kong dollar debt instruments reached HK$1.99 trillion (US$255 billion) as at the end of December 2010, up from HK$1.24 trillion in 2009.
While the Hong Kong bond market is not among the largest – or deepest in Asia – there is still a good range of investment-grade quality securities for investors to choose from, says Ms. Chan who as head of fixed income also oversees the team to manage the ABF Hong Kong Bond Index Fund, which is listed on the Hong Kong Stock Exchange (Code:2819). The Fund has outperformed cash over the past years by 2.8% per annum on average.
The risk and return profile of HK$ bonds could be appealing compared to global bonds and global equities. For the five-year period from April 2004 to April 2009, HK$ bonds produced a return of 4.89% with a volatility of 4.01%. This compared with a return of 5.5% for global bonds on a volatility of 7.32% while global equities delivered returns of just 0.32% and a volatility of 17.51%. Hong Kong equities, on the other hand, produced a return of 9.08% on a volatility of some 23.44%, the highest among the four asset classes.
Since then though, and amidst a period of low interest rates, HK$ bond yields have moved lower significantly in line with the regime in the US which has seen a prolonged period of low rates. Compared to cash deposits, the HK$ bonds still offer some yield pick-ups with the magnitude depending on investors’ choice of maturity and credit risk profile.
The activity of the HK$ bond market has been quite steady in the last few years. According to Ms. Chan, the new issuance focusses on high-grade issuers.
She says in the year to date, the new issuance of CNH bonds are particularly active with focus on shorter-dated maturities (up to five years) as issuers will find it hard to hedge their interest rate risks at this stage.
“There is no denying that investors are attracted to some higher yielding bonds that could possibly be obtained in the offshore RMB corporate market as well as the potential of RMB currency appreciation,” she explains. “However, investors need to be aware of the credit risks involved in individual CNH bonds. The CNH bond market is more diverse in terms of credit quality.
Besides credit risk, liquidity risk is another important factor for consideration when investing in CNH bonds. “Unlike the more established HK$ bonds, CNH bonds are a new development and with anything new, the market will take some time to settle down,” notes Ms. Chan.
For more information, please contact
Director, Head of Institutional Business, Asia-Pacific
Level 22, HSBC Main Building,
1 Queen’s Road Central, Hong Kong
Tel: 852-2284 1008
Fax: 852-2284 1254