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Monday, 21 April 2014

BONDS: Hong Kong targets HK$10bn in second linker

The Hong Kong Government will be offering its second batch of inflation-linked bonds to the public on June 5–13 at a target size of HK$10bn (US$1.28bn). The three-year notes, dubbed ’iBonds’, are scheduled to settle on June 22. There is a 1% floor for the coupon.

Source: Reuters/Bobby Yip

KC Chan, Hong Kong’s Secretary for Financial Services and the Treasury, speaks during an interview with Reuters in front of a harbour view of Hong Kong August 3, 2010

This will the second iBond issue from the government, following a HK$10bn debut in July 2011. The new iBonds will pay a semi-annual coupon linked to the consumer price index for the preceding half-year period, plus a margin – following an identical formula to the outstanding paper.

Taking into account the latest CPI figures, the new bond is expected to pay a first coupon of around 3.5% – far lower than the 6.08% on the outstanding iBonds in the preceding period. The lower pricing reflects lesser inflationary pressures at this time, compared with the first bond when inflation worries were more intense.

For the same reason, the price of outstanding iBonds fell to 105.65 on May 29 from 107.6 on May 11, although there have been few sellers in the secondary market.

Given that three-year HK Government Exchange Fund notes are quoted at a bid of around 0.546%, the new iBonds will still be seen as a “gift” of a deal to Hong Kong residents, making the fundraising a shrewd strategic political move. The response is already expected to be better than the last time.

Bank of China and HSBC, which have the largest retail networks in the city, will again lead the marketing effort for the new iBonds. Another 20 or so local banks will join as placement agents.

As in the previous issue, only residents holding Hong Kong ID cards are eligible to participate in the issue. No permanent residency is needed. The purpose of the issuance is to develop further the retail bond market in Hong Kong.

The response to the previous deal was weaker than expected. Since then, the renminbi appreciation and inflation expectations have both eased considerably over the past six months and investors who did not subscribe to the last deal had regretted missing out after the first interest payment was fixed at a relatively high yield of 6.08% per annum.

The new paper will be issued off a HK$100bn government bond programme, which was set up in mid-2009 to develop the domestic bond market.

Hong Kong is rated Aa1/AAA (Moody’s/S&P) with a stable outlook.

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