Hong Kong to snap up government offer of inflation-linked bonds

Hongkongers likely to seize chance to lend money to their government, receive interest at a rate linked to inflation

PUBLISHED : Friday, 17 May, 2013, 12:00am
UPDATED : Friday, 17 May, 2013, 6:35am

The Hong Kong Monetary Authority's anticipated sale of a third tranche of inflation-linked bonds is set to meet with a rich vein of demand despite a recent decline in the rate of consumer price rises.

Hong Kong's annual rate of consumer inflation eased to 3.6 per cent in March from February's 10-month high of 4.4 per cent, and market participants expect the new "iBonds" to be sold with an underlying reference inflation rate of around 3.5 per cent.

But with consumer prices expected to tick higher - economists at HSBC forecast an annual inflation rate of 4.5 per cent in 2013 - analysts anticipate healthy demand for the new issue, much like that seen for the two prior tranches.

"It's a no-brainer trade if you buy at par at new issue," Ben Sy, head of fixed income of JP Morgan Private Bank in Asia, told the South China Morning Post.

Hong Kong government bonds with a three-year maturity yield just 0.34 per cent per annum. Even if Hong Kong fell into deflation and the iBond paid just an expected minimum 1 per cent coupon, that would still be three times better.

Market participants anticipate the bonds to be sold in June. Mavis Hui, spokeswoman for the Financial Services and the Treasury Bureau, said a sale date had not been finalised.

"The preparatory work for the third iBond is in progress. We will make an announcement once the timetable has been fixed," Hui said.

The HKMA held closed-door briefings with brokerages on Wednesday to discuss procedures for processing iBond applications, in a sign the issuance date is close.

The wild card for the timing of the new iBonds had been legislative approval. The iBond scheme is part of the Hong Kong budget, approval for which was blocked by weeks of filibustering.

However, Legislative Council president Jasper Tsang Yok-sing ended the filibuster on Tuesday afternoon, clearing the way for approval of the budget bill.

Analysts expect this year's iBond to replicate the terms of the bonds issued in 2011 and 2012 - a HK$10 billion offering of three-year securities that pay interest at a rate equal to the consumer price index, with a minimum return of 1 per cent.

The offer is aimed at individual investors and to be sold in allotments of HK$10,000.

Inflation has come down since the original iBond issue, in 2011, and that is reflected in lower coupons. The coupon on iBond I was an annualised 6.08 per cent. Most recently, on January 28, the interest for the same bond was an annualised 3.38 per cent.

Outstanding iBonds trade at a premium. The first iBond trades 3.2 per cent above its original price, while iBond II, issued in 2012, trades at a 5.9 per cent premium. The securities trade on the Hong Kong exchange.

Peter Lee, head of fixed income Asia for SG Private Banking, expects demand for iBond III to be similar to last year's offer, which was five times subscribed, generating HK$50 billion in orders. The previously issued iBonds jumped in price on day one, by 6.7 per cent and 5 per cent, respectively, for iBonds I and II.

Interest in other asset classes, may curb enthusiasm for the paper, Lee said. The combined dividend yield on Hang Sang Index stocks is 3.5 per cent, based on 2012-2013 earnings, roughly in line with the anticipated reference rate of the upcoming iBonds.

"There is more choice from higher-risk assets with more return," Lee said.