Dim-sum bond returns cannot match the hype

Investors' interest in offshore yuan bonds is holding up well so far this year but the average performance of the so-called 'dim sum' bonds has been disappointing.

According to an index compiled by Bank of China (HK), the average total return of yuan bonds was only 1.74 per cent so far this year.

The average yield rose to 3.63 per cent as of April 4 from the lows of 1.74 per cent in January.

The Bank of China yuan bond index tracks the daily interest and price changes of offshore yuan bonds with a minimum outstanding face value of 500 million yuan (HK$593.3 million).

However, analysts said it was a case of familiarity breeds contempt, and now that the novelty of the market was wearing off, investors were increasingly focusing on credit and liquidity risks.

There has been virtually no secondary trading in most of the bonds since the market started operating in July 2010, and a significant number of yuan bond issuers were not rated.

A report released by British bank RBS recently warned that yuan bond investors could be underestimating their credit exposure because credit risks had not been fully reflected in the 'exceedingly low yields' of offshore yuan bonds.

Many yuan bond investors keep their holdings because the currency is widely expected to appreciate.

Although secondary trading is scarce, there is no shortage of primary issuance as mainly mainland borrowers continue to raise capital while Beijing pressures banks to curb lending and onshore interest rates are expected to keep climbing.

The total issuance of offshore yuan bonds amounted to US$1.53 billion with 14 deals brought to the market in the first quarter of this year, according to data provider Dealogic.

Corporate high-yield borrowers, which are rated below investment grade, made up six out of the top 10 largest yuan bond deals.

For borrowers with lower credit profiles, such as the mainland property developers, bond proceeds have been collected in the form of 'synthetic' yuan bonds.

A total of US$2 billion of capital was raised in four synthetic bonds launched in the first quarter of this year, according to Dealogic. Three of the four were from mainland property developers.

Synthetic yuan bonds pay interest to investors in US dollars, but the payment is linked to the yuan exchange rate, effectively giving bondholders exposure to the currency.

Analysts believe the cut in yuan deposit rates to 0.72 per cent in Hong Kong last week could affect the yields on short-dated bonds.