Government debt offer may be in September

PUBLISHED : Saturday, 01 August, 2009, 12:00am
UPDATED : Saturday, 01 August, 2009, 12:00am

The Hong Kong government would initially sell bonds to institutional investors under its planned debt programme, with the timetable to be published in days, sources close to the government said.

Under a similar mechanism to the Exchange Fund notes programme, the tentative issuance schedule would be announced about a month before the paper was issued, implying the first government bond could be released as early as September.

The government secured approval from the Legislative Council early last month to set up a bond programme to increase the breadth, depth and liquidity of Hong Kong's debt market.

The programme is capped at HK$100 billion, and there are plans to issue between HK$10 billion and HK$20 billion in the first 12 months. Bonds will be available to both institutional and retail investors.

The sources said the government was still actively preparing to issue retail bonds but with the current market conditions this was a challenge, as interest rates were too low.

'Institutional investors have greater demand for government bonds at this stage, so the institutional tranche will be issued first,' the sources said.

Market observers said the bonds' attractiveness would depend on their return and time to maturity.

'Bonds with three- to five-year maturity will be attractive,' said Clement Ho, a director and chief investment officer at Hang Seng Investment Management.

He expected interest rates in Hong Kong to remain low for a period of time owing to ample liquidity in the market.

That would make short-term paper unattractive, while the outlook for the long-term bond yields was uncertain.

Sources said the government planned to issue a few tranches of Hong Kong dollar-denominated bonds with a maturity of two years and above in its first attempt, without disclosing the issue amount.

The bonds will be offered through a competitive tender, similar to the Exchange Fund notes, and the tentative issuance schedule, including details of the planned issue amount, tenure and tender and issue date, will be published shortly.

The interest rate of the bonds will be determined by the market, as they will be sold through competitive tender.

'The market widely expects the yields will fall between the yield of Exchange Fund notes and interest-rate swap price,' said the sources, adding that it would likely be closer to the swap rates.

The yield of three-year Exchange Fund notes stood at 0.99 per cent, while the interest-rate swap stood at 1.96 per cent on Thursday.

Wilson Chan, the chief of investment and product development at Shanghai Commercial Bank, said institutional investors needed to balance their investment portfolios and looked for high-quality paper, particularly during the financial turmoil.

'The good credit rating of the Hong Kong government will attract demand,' Mr Chan said.