Why Hong Kong iBonds, China government bonds offer a haven to investors seeking yields

Name: Five things that could trigger the next global recession
Uploaded: 2020-10-09T07:30:12.000Z
Duration: 2 min 36 s
Description: Five things that could trigger the next global recession

US and European government bonds used to be an insurance policy but now investors are paying a higher price for protection that might not be as effective

Hong Kong’s inflation-linked bonds offer an alternative, while Chinese bonds are increasingly drawing international investors’ attention

Reading Time:3 minutes

Why you can trust SCMP

A poster advertising the launch of Hong Kong iBonds at a Bank of China branch in Central on July 23, 2014, the first day of public subscription. The latest round of iBonds will include some with yields of 2 per cent, an enticement to investors at a time when many central banks are considering interest rates near or even below zero. Photo: K.Y. Cheng

Tai Hui

Published: 3:30pm, 9 Oct 2020Updated: 10:28pm, 9 Oct 2020

The recent announcement that Hong Kong plans to issue inflation-linked government debt may have retail investors thinking about the role of bonds. The problem is that today’s markets are anything but conventional and the traditional rules of the game have changed.

A classic principle of good investing used to be to maintain diversification – buy assets that don’t move in the same direction, much like taking out an insurance policy. For example, if equities go through a sharp correction, bonds used to have a negative correlation with equities and would provide some stability to a portfolio.

In the past, US and European government bonds were used as a sort of insurance policy. Government bond prices traditionally rise when the equity market becomes more volatile. However, investors are now paying a higher price for such protection and there are worries the protection may not be as effective as in the past.

One of the biggest shifts is the level of bond yields or, from another perspective, bond prices. The 10-year US government bond yield fell from almost 1.9 per cent at the start of 2020 to 0.78 per cent now. When bond yields go down, bond prices naturally go up. Some might even argue government bond prices in developed economies are now too expensive.

There are several problems with this. First, investors are only receiving 78 cents in interest each year for every US$100 invested. While this is still better than the return from cash, it is below inflation in Hong Kong, which averaged 0.9 per cent for the first eight months of 2020.

02:36

Five things that could trigger the next global recession

Second, historical data shows the long-term return from investing in US government bonds is closely related to the level of yield on investment. For example, if you buy US$100 worth of 10-year US government bonds today with the yield at 0.78 per cent, you should expect an annualised return of around 0.78 per cent for the next 10 years.