Tight spread seen between China's onshore and offshore bonds

Volatile currency trading among factors expected to bring a gradual convergence on yields in the two markets for Chinese government debt

PUBLISHED : Friday, 30 May, 2014, 1:10am
UPDATED : Friday, 30 May, 2014, 1:39am

The difference between China's onshore and offshore bond yields is seen staying in a tight range for the rest of this year, as offshore issuers are expected to keep yields on their dim sum bonds at their current level to price credit more accurately, BOCHK Asset Management says.

A more volatile currency market and the opening up of more investment channels between the offshore and the onshore markets - which make offshore investors more concerned about risks and demand higher compensation - meant yields in the two markets will converge gradually over the long term.

The yield spread between the 10-year China government onshore and offshore bonds is expected to remain between 50 and 100 basis points for the rest of the year, Ben Yuen Cheuk-bun, head of fixed income at BOCHK Asset Management, told a press conference in Hong Kong yesterday.

"Demand for the offshore renminbi bond is robust. We have seen a lot of interest from European investors in the offshore renminbi bond recently."

In the first four months of this year, the total issuance in the dim sum bond market accounted for up to 80 per cent of whole-year issuance in 2013 and the pipeline is expected to be full, he said, adding that 300 billion yuan (HK$376.5 billion) of offshore yuan bonds were expected to mature by the end of this year.

Bond yields usually increase when the issuers see less demand for their notes and thus have to raise their coupon payments to compensate for low demand.

But Yuen sees demand by offshore bond investors for dim sum bonds holding up.

According to the asset manager's quarterly report, the yield on the onshore 10-year government bond stood at about 4.5 per cent at the end of March, compared with 4 per cent for its offshore counterpart.

Spreads between onshore and offshore bond yields have increasingly narrowed since the offshore yuan bond market started to take off in July 2010, as market participants began looking at this market as more of a credit market than just a way to enjoy currency appreciation.

Fundraising costs are still cheaper in the offshore yuan market. According to a white paper issued by Asia Securities Industry and Financial Markets Association, the average coupon on onshore bonds is 3.8 per cent in 2014, up from 4.7 per cent in 2010.

Average coupons on offshore yuan bonds have moved to 3.2 per cent in 2014 from 2.4 per cent in 2010.

Yields describe the total amount of money an investor can make on a note.

If government bond yields go up in the secondary market, other bonds would have to return higher yields to attract investors in order to remain competitive.