New index shows government's iBonds are not always a sure bet

Government-backed debt not immune to interest rate concerns sparked by Fed's tapering plan

PUBLISHED : Tuesday, 08 October, 2013, 12:00am
UPDATED : Tuesday, 08 October, 2013, 3:28am

Local retail investors have deemed inflation-linked bonds, debt instruments backed by the Hong Kong government, one of safest asset types, but a new index compiled by the Hang Seng Indexes Company shows they are not necessarily a safe haven.

Since 2011, the Hong Kong government has issued HK$10 billion worth of so-called "iBonds" each year to help residents fight inflation. The number of subscribers to the third batch released this year reached a record high as investors believe such products are almost risk free and better than the paltry returns on bank deposits.

However, data show that positive gains are not guaranteed. A sharp sell-off in June wiped out year-to-date gains for the second batch of iBonds, which were issued in June last year, according to the newly compiled Hang Seng iBond Index series, which tracks the general performance of all iBonds available in the market.

Expectations of a rise in interest rates, which usually move inversely to bond prices, increased in June after the US Federal Reserve hinted that it might begin to taper its bond-buying programme. The prospect of the tapering of quantitative easing triggered a massive sell-off in the emerging bond market and iBonds were among the victims.

"Investors should be reminded that a return is not always positive for iBond investment," said Vincent Kwan, director and general manager of Hang Seng Indexes. "Just like other bonds, iBond have close ties to the interest rate environment."

Taking into account accrued interest, the 2012 batch had delivered a year-to-date negative return of 0.2 per cent by the end of September. That means that if an investor had bought the second batch of iBonds in the secondary market at the beginning of this year, he would have lost 0.2 per cent of the total investment after nine months. Even the 2011 batch, less sensitive to interest rate changes due to their shorter duration, gained only 0.75 per cent in the first three quarters.

Kwan said the value of the 2011 batch had fallen by 1.11 per cent in the 10 days after the US central bank hinted on June 19 at the likelihood of tapering.

However, subscribers who bought it at the launch of each iBond batch have still seen positive accumulative returns. For each HK$100 worth of iBonds they subscribed to, an investor would have earned HK$12.01 from the 2011 batch, HK$7.72 from the 2012 batch and HK$5.59 from this year's batch.