Putting faith in government iBonds is more iDiocy

PUBLISHED : Tuesday, 24 April, 2012, 12:00am
UPDATED : Tuesday, 24 April, 2012, 12:00am


There is a debt instrument that yields more than 6 per cent. It is simple, transparent, low fee, and involves no currency risk. It is easily traded on the Hong Kong exchange. The issuer is rated triple A (Standard & Poor's). It is the iBond.

Money Post, SCMP, April 23

It is true. The yield on iBonds, which are issued by our government, may have dipped under 6 per cent since the end of the year but you will not find other debt instruments with yields so high in Hong Kong.

I have a better investment choice for you, however. Why not try a Mark 6 ticket? The odds against you winning anything are hundreds of thousands to one but if you win you could get hundreds of thousands of dollars back for every dollar you put down.

I grant you that the odds are better on the iBond. The total amount in issue at present is HK$10 billion, as against HK$5.15 trillion in total Hong Kong dollar deposits and debt instruments in our financial system, which gives you ownership odds of 1 in 515.

But all you get from an iBond is your money back in three years time plus interest at the annual rate of inflation on the consumer price index, with a guaranteed minimum of 1 per cent. As the chart shows, this is higher than deposit rates at the moment, but it's not always been so.

And, oh yes, forgot to mention, even this opportunity is no longer available. These were the terms if you bought iBonds in the original issue last year. To get them now, you have to buy them on the market at a higher price (and take a loss on redemption) or wait for another issue in June.

Given the general balance of odds and potential gains, and for all the paperwork involved, you may just find the Mark 6 a better idea.

In fact, I regard these iBonds as a cynical ploy by our financial secretary, John o' the Whiskers, to polish up his image the cheap way in his budget last year.

He said at the time that they 'will help reduce the impact of inflation on our people', which, even then, he knew perfectly well was disingenuous when only one dollar out of every 515 in debt obligations could be protected from inflation this way.

Even this was not done. As he does not understand the operation of financial markets very well, I shall forgive him for not realising that he only encouraged speculators with this silly idea, but it is nonetheless what he did. Few of the original buyers still hold iBonds. The price immediately jumped on the market because of the high yield and they quickly sold out at a profit.

Our most forgettable financial secretary since Hamish Macleod also said at the time that these iBonds would promote 'the development of the local retail bond market'.

It is one of our government's recurrent pipe dreams, a Hong Kong dollar bond market as liquid as the Hong Kong dollar stock market so that local companies can have an easy alternative to bank borrowings.

What it requires, however, is a huge amount of tradable government debt to set a benchmark rate of return for the most liquid and least risky instrument on such a bond market. All other issues are then priced from it.

Fortunately, however, this sort of profligacy is not among our government's failings yet, cross your fingers. Hence, no benchmark, no liquidity for corporate issues and also no need for them when the US dollar debt market is a better alternative with our peg to the US dollar.

Only 7.5 cents out every HK$1 in HK dollar debt instruments is corporate. The rest is all government of some form. This is one horse that just won't drink no matter how much you lead it to water.

It's also a puzzle to me how our man thinks he will stimulate a commercial debt market with iBond- style non-commercial terms for debt.

We'll just call it Diocy. Put a small 'i' in front of that.