The Exchange Fund, the reserve that backs the Hong Kong dollar, recorded a further deficit last month after booking an investment loss of HK$74.9 billion last year. The accumulated surplus of the fund fell HK$52.82 billion or 10.99 per cent to HK$427.84 billion from HK$480.65 billion in December last year, the Hong Kong Monetary Authority's latest figures showed. The HKMA did not give a reason for the decline in the surplus but it is generally believed that it was mainly a result of losses on its investments. Daniel Chan Po-ming, a senior investment strategist at DBS Bank (Hong Kong), said the fund could have been hit hard by the downturn in equity and bond markets last month. The Hang Seng Index declined 7.71 per cent during the month, and the bond market also suffered from capital outflows as investors considered bonds overvalued. 'The fund could suffer an investment loss again this year unless there is a great rebound in the equity markets,' Mr Chan said. Last year, the fund recorded its first investment loss since the HKMA was set up in 1993, with a negative return of 5.6 per cent resulting from the global financial crisis. Law Ka-chung, the chief economist and strategist at Bank of Communications, said investment markets would remain challenging. However, he expected the fund to be profitable this year, as bond prices would be supported by concerns about deflation and by continued purchases of US Treasuries by countries including China. 'The [fund's] gains from bond investments could more than offset the loss in equities,' Mr Law said. Meanwhile, the Exchange Fund's assets fell HK$7.4 billion last month to HK$1.55 trillion. The fund's foreign-currency assets decreased HK$13 billion to HK$1.43 trillion. Separately, Hong Kong's deposits fell 1.2 per cent last month. Yuan deposits in Hong Kong declined 3 per cent to 54.4 billion yuan (HK$61.68 billion) at the end of last month, the HKMA said. Total loans and advances shrank 0.5 per cent during the month to HK$3.27 trillion.