Lower dim sum bond returns deter investors

Investors are becoming more cautious about buying offshore yuan bonds after the busiest month of issuances, as yields falter on dim sum bonds.

The yield, one of the key determinants of investor appetite for the notes, has fallen 62 basis points from its June peak, according to data from HSBC. The asset class now yields about 4.1 per cent annually - a level seen by many fund managers as too low.

Meanwhile, investors are also cautious about investing in the notes, thanks to the likelihood of limited capital gains to the surfeit of supply in the pipeline. Beijing has said it will approve a total quota of 75 billion yuan (HK$95.6 billion) to state-owned firms to issue dim sum bonds next year.

"Most managers have closed books unless it has good value as we are approaching the year-end," said Clifford Lee, the head of fixed income at DBS Bank. "The issuance window was shut down from March to August, so there had been a lot of pent-up issuances [since September]. [But] the market is still quite headline-driven and volatility is high, meaning the market could shut down as uncertainties rise."

Oil giants Total and BP, which were among the eight entities to issue dim sum bonds in the past two months, had to price their issues at yields of about one percentage point above fair value to attract investors, according to two Hong Kong-based fund mangers who both subscribed for the notes.

"Investors would normally ask for a higher yield premium for notes denominated in yuan for the risks they are taking," said one of the fund managers.