One of the most telling indicators of confidence in Hong Kong is the gap between United States and territory interest rates.
In theory they should be the same - in practice the differential represents a crucial barometer of financial well-being.
Since the New Year some remarkable goings on in the Hong Kong dollar bond market have dramatically reduced the interest premium demanded by investors to hold local currency debt.
Hong Kong dollar bonds stretching out to 2000 now yield less than their US equivalent while the premium for longer-dated securities has all but vanished.
The market seems to be saying the US economy presents more short-term risk than Hong Kong. Weird? After all, recent weeks have seen Chief Executive designate Tung Chee-hwa announce a clampdown on political rights of assembly and key government figures like Financial Secretary Donald Tsang fighting for his job.
In any market, the prospect of a new government presents uncertainty, finding its expression in interest rate and currency movements. Yet, the Hong Kong bond market keeps rallying.
Five-year local bonds are trading just 12 basis above treasuries compared with 65 basis points in October. Last week dealers reported aggressive buying of five, seven and 10-year bonds, flattening the curve to the point where even the most optimistic traders wondered how long the rally could last.
