The Hong Kong debt market in 2015
by Financial Infrastructure Department
The international bond market faced a mixed environment in 2015. The Greek
government debt crisis hampered the recovery progress in Europe and expansionary monetary policies were adopted in most of the developed countries with a view to stimulating the economy. Meanwhile, the US Federal Reserve finally raised the target range for the federal funds rate in December, signalling the start of US interest rate normalisation. In the Hong Kong dollar debt market, the total issuance volume of Hong Kong dollar debt instruments continued to grow to a record level. Further measures were implemented by the Hong Kong SAR Government to support the development of the local bond market under the Government Bond Programme, including the issuance of the second sukuk (Islamic bond) in June and the debut 15-year Government Bond in July.
Overview of the international bond market
Market expectations of interest rate normalisation in the US, coupled with divergent monetary policies in developed markets, had increased volatility in the international bond markets.
The European Central Bank adopted expansionary monetary policies in early 2015 through the expansion of its asset-purchase programme to stimulate economic recovery. However, the Greek government debt crisis triggered concerns over a possible Greek exit from the eurozone in early summer, leading to a slump in the bond market in eurozone. Although negotiations between the Greek government and the eurozone members were held in late June, the rejection of the bailout terms in a Greek referendum further affected market sentiment. The market gradually stabilised only after a new agreement was reached in July.
With the conclusion of the US Federal Reserve (Fed)’s asset-purchase programme in late 2014, expectations that the Fed would begin raising interest rates gathered pace. This was particularly so before the September and October Federal Open Market Committee (FOMC) meetings. The target range for the federal funds rate was finally increased by 25 basis points to 0.25%–0.5% at the December FOMC meeting. As the decision had been widely expected, it did not cause significant fluctuation to the market. The lift-off signified the beginning of the US interest rate normalisation. The market in general expected that the pace of future rate hikes would likely be gradual and depend on the pace of US economic recovery.
In the developed economies, interest rates were volatile and generally on an increasing trend in 2015 (Chart 1), affected mainly by market expectation of US interest rate normalisation. The outlook for the bond market in the coming year will be challenging against the backdrop of uncertainties in the global economic recovery. In addition, economic conditions in Mainland China, oil price movements and excess capacity in commodity markets could also be key factors affecting the debt market.
CHART 1
Average borrowing costs in developed and emerging markets
Average yields of the following benchmark indices are used as proxies to the yield levels of the corresponding markets.
Developed markets The BofA Merrill Lynch G7 Government Index
Emerging markets The BofA Merrill Lynch US Dollar Emerging Markets Sovereign Source: Thomson Reuters.
Hong Kong Debt Market Review
Hong Kong dollar debt issuance increased for the seventh consecutive year to reach HK$2.49 trillion in 2015, an increase of 2.6% from 2014. Steady growth in the size of bond issues amid the volatile international bond market demonstrated the healthy development of the local debt market. The broad investor base here has attracted more issuers to utilise the funding platform in Hong Kong.
Overseas corporates
Overseas issuers continued to tap the Hong Kong dollar market in 2015, with issuance volume rising by 16.5% from 2014. Riding on the momentum in 2014, the US dollar/HK dollar basis swap rates were positive during most of 2015 (Chart 2). This
favourable swap market environment allowed overseas issuers to issue bonds in Hong Kong and then swap the proceeds back to US dollar to achieve cheaper all-in funding costs. Overseas corporates could also expand their investor base and broaden the funding sources through the issuance in Hong Kong, which assisted them to build up a better funding structure.
CHART 2
Key tenors of USd/HKd basis swaps
Source: Bloomberg.
Local corporates
In contrast to overseas issuers, local corporates lowered their funding scale in the local debt market, with issuance volume dropping to HK$14.2 billion, down 57.4% from 2014. With expectation that interest rates would start rising in 2015, most local corporates had already completed their major funding plans in 2014 and tended to be more opportunistic in new bond issuance. Companies were also more cautious about expanding their business due to an uncertain economic outlook, leading to fewer funding activities by local corporates.
Government Bond Programme
The HKMA continued to implement the Government Bond (GB) Programme in 2015 to promote the further and sustainable development of the local bond market. Thirteen issues of institutional bonds totalling HK$68.9 billion and three issues of inflation-linked retail bonds (i.e. iBonds) totalling HK$30 billion were outstanding at the end of 2015.
Apart from the Hong Kong dollar bonds, two US dollar sukuk issues, each with an issuance size of US$1 billion, were also outstanding (i.e. total US$2 billion).
Establishing benchmark yield curve
Starting from 2015, the tenors of bonds issued under the Exchange Fund Bills and Notes Programme and the GB Programme were streamlined. The HKMA only issues new Exchange Fund papers for tenors of two years or below; and new GBs for tenors of three years or above. After the streamlining, a unitary benchmark yield curve representing the credit standing of the Government could be formed in the long run, with Exchange Fund Bills and Notes providing the benchmark yield for two years and below and GBs providing the benchmark yield for three years and above. A unitary benchmark yield curve could provide a better reference for other issuers in pricing their Hong Kong dollar issues.
As part of the streamlining, the first 15-year GB tender, worth HK$0.6 billion, was held on 15 July.
The tender was well received by the market with the bid-to-cover ratio (the ratio of bonds applied for to bonds issued) at 2.76. The HKMA will continue to hold 15-year GB tender on a regular basis to meet investor demand and build a credible reference point at the long end of the benchmark yield curve.
Sukuk in Wakalah structure
Following the successful issuance of the inaugural sukuk in 2014, the Government issued another sukuk under the GB Programme with an issuance size of
US$1 billion and a tenor of 5 years on 3 June 2015.
This issue used Wakalah structure, where one-third of assets were underpinned by selected units in an office building in Hong Kong, and two-thirds of the assets were underpinned by shariah-compliant commodities, making Hong Kong the first AAA- government sukuk issuer to adopt this structure. The sukuk was issued by a special-purpose vehicle wholly owned by the HKSAR Government, and was listed in Hong Kong, Malaysia and Dubai. The sukuk received warm welcome from global investors, attracting orders of US$2 billion from a diverse group of international investors. Priced at 1.894%, it gave the Government a cheaper funding cost than that for the inaugural sukuk issue in 2014 (2.005%).
The use of the “asset light” structure in the latest issuance set a benchmark for potential issuers in the private sector and demonstrated the flexibility of Hong Kong’s Islamic finance platform.
TABLE 1
Summary of the key parameters of the two series of sukuk under the gB Programme
Issue date Size Tenor Format Price Investor orders
Investors by location
Investors by type
Islamic structure Underlying assets
Sukuk 1
• Sep 2014
• US$1 billion
• 5 years
• Rule 144A / Reg S
• 2.005%
• 5Y UST + 23 bps
• US$4.7 billion
• Over 120 investors
• 47% Asia
• 36% Middle East
• 11% US
• 6% Europe
• 56% banks and private banks
• 30% sovereign wealth funds
• 11% fund managers
• 3% insurance companies
• Ijarah
• 100% government properties
Sukuk 2
• Jun 2015
• US$1 billion
• 5 years
• Reg S
• 1.894%
• 5Y UST + 35 bps
• US$2 billion
• 49 investors
• 43% Asia
• 42% Middle East
• 15% Europe
• 77% banks, private banks and fund managers
• 23% sovereign wealth funds, central banks and supranationals
• Wakalah
• 34% government properties
• 66% exchange- traded commodities
Retail bonds
The Government issued HK$10 billion iBond in 2015. It was the fifth-consecutive series of iBond since 2011. The number of valid applications was a record high of 597,895, with total subscription of nearly HK$36 billion. According to market sources, first-time investors made up 9–15% of the
successful subscribers in the past five issuances.
The iBond issuances not only provided an additional choice of investment to the public, but also sustained the growth momentum of the local bond market through enhancing public awareness of, and interest in, bond investments. The iBond issuance
successfully broadened the investor base of the local bond market, encouraging more issuers to consider tapping the market through retail issuance.
Looking forward
Not long ago, many investors thought that the global bond market had reached its climax as short term policy interest rates were already at rock-bottom level. However, with the European Central Bank and the Bank of Japan adopting negative interest rate policy, this has become less certain. Very short term up to 10-year Japanese Government Bonds (JGBs), which account for the lion’s share of the outstanding total, are now trading in negative yield territory.
German government bonds are now trading in negative territory from very short term up to 5 years, which account for more than half of the outstanding total. As bonds are now in great demand in these major economies, it is not impossible that some of the demand may spill over to government bonds in other economies, especially those which are still yielding positive rates.
Through the implementation of the GB Programme, the HKMA will continue to support the development of the Hong Kong dollar debt market. Continued communication with market participants will enhance the competitiveness of the local market as a fund raising platform. With a view to supporting the development of Islamic finance in the local market, the Government will launch another sukuk when market conditions are favourable.
APPENDIX (see notes)
Issuances of Hong Kong dollar debt instruments (in HK$ million)
(A) Exchange
Fund
(B) Government
(A) + (B) Public Segment (year-on-year
rate of change)
(C)
Authorized Institutions
(D) Local corporates
(E) MDBs
(F) Non-MDB
overseas issuers
(G) Statutory bodies &
government- owned corporations
(C) to (G) Non-public
Segment (year-on- year rate of change)
Total (year-on-
year rate of change)
1998 316,850 0 316,850 32,889 7,320 44,502 7,006 9,171 100,888 417,738
1999 261,443 0 261,443
(-17.5%) 81,280 26,228 15,920 21,197 8,931 153,556
(52.2%)
414,999 (-0.7%)
2000 275,036 0 275,036
(5.2%) 97,949 17,902 19,330 37,404 8,325 180,910
(17.8%)
455,946 (9.9%)
2001 237,009 0 237,009
(-13.8%) 72,001 5,808 7,462 42,464 24,075 151,810
(-16.1%)
388,818 (-14.7%)
2002 216,228 0 216,228
(-8.8%) 94,133 9,484 5,200 50,746 20,760 180,323
(18.8%)
396,551 (2.0%)
2003 219,648 0 219,648
(1.6%) 94,374 5,470 2,641 51,955 15,724 170,164
(-5.6%)
389,811 (-1.7%) 2004 205,986 10,250 216,236
(-1.6%) 74,289 9,321 3,530 55,649 17,799 160,588
(-5.6%)
376,824 (-3.3%)
2005 213,761 0 213,761
(-1.1%) 97,795 11,067 1,800 69,014 8,560 188,236
(17.2%)
401,997 (6.7%)
2006 220,415 0 220,415
(3.1%) 82,242 21,771 2,950 109,297 17,419 233,679
(24.1%) 454,094 (13.0%)
2007 223,521 0 223,521
(1.4%) 100,143 19,078 1,700 80,977 19,368 221,266
(-5.3%)
444,787 (-2.0%)
2008 285,875 0 285,875
(27.9%) 68,029 14,592 3,000 28,556 24,308 138,485
(-37.4%)
424,360 (-4.6%) 2009 1,047,728 5,500 1,053,228
(268.4%) 75,566 19,539 13,145 50,744 29,852 188,846
(36.4%)
1,242,073 (192.7%) 2010 1,816,752 18,500 1,835,252
(74.3%) 103,413 13,583 315 32,222 11,187 160,720
(-14.9%)
1,995,972 (60.7%) 2011 1,841,278 27,500 1,868,778
(1.8%) 136,310 28,282 0 17,779 20,195 202,566
(26.0%) 2,071,345 (3.8%) 2012 1,851,575 26,000 1,877,575
(0.5%) 190,078 27,688 790 22,219 12,027 252,802
(24.8%)
2,130,377 (2.8%) 2013 2,123,448 30,000 2,153,448
(14.7%) 143,027 25,573 940 23,121 10,665 203,326
(-19.6%)
2,356,774 (10.6%) 2014 2,177,293 30,800 2,208,093
(2.5%) 127,130 33,278 1337 50,529 9,647 221,921
(9.1%)
2,430,015 (3.1%) 2015 2,242,206 30,400 2,272,606
(2.9%) 136,350 14,186 0 58,859 12,015 221,410
(-0.2%)
2,494,017 (2.6%) Source: HKMA.
Outstanding size of Hong Kong dollar debt instruments (in HK$ million)
(A) Exchange
Fund
(B) Government
(A) + (B) Public Segment (year-on-year
rate of change)
(C)
Authorized Institutions
(D) Local corporates
(E) MDBs
(F) Non-MDB
overseas issuers
(G) Statutory bodies &
government- owned corporations
(C) to (G) Non-public
Segment (year-on- year rate of change)
Total (year-on-
year rate of change)
1998 97,450 0 97,450 161,110 28,286 69,402 25,529 11,366 295,693 393,143
1999 101,874 0 101,874
(4.5%) 177,437 41,219 61,287 37,259 20,117 337,319
(14.1%)
439,192 (11.7%)
2000 108,602 0 108,602
(6.6%) 189,137 41,970 57,062 55,103 20,047 363,319
(7.7%)
471,921 (7.5%)
2001 113,750 0 113,750
(4.7%) 178,788 41,703 51,104 72,351 35,873 379,819
(4.5%)
493,568 (4.6%)
2002 117,476 0 117,476
(3.3%) 184,736 40,245 40,834 99,514 48,212 413,541
(8.9%)
531,018 (7.6%)
2003 120,152 0 120,152
(2.3%) 196,972 34,519 27,855 121,486 56,441 437,273 (5.7%)
557,426 (5.0%) 2004 122,579 10,250 132,829
(10.6%) 207,214 35,338 24,735 147,579 60,186 475,052 (8.6%)
607,880 (9.1%) 2005 126,709 10,250 136,959
(3.1%) 233,442 39,624 21,535 174,247 57,712 526,560
(10.8%) 663,520 (9.2%)
2006 131,788 7,700 139,488
(1.8%) 241,030 53,864 19,555 237,308 56,876 608,633 (15.6%)
748,121 (12.8%)
2007 136,646 7,700 144,346
(3.5%) 250,941 62,044 13,155 234,482 58,476 619,098 (1.7%)
763,443 (2.0%)
2008 157,653 5,000 162,653
(12.7%) 206,471 68,265 14,253 199,943 64,618 553,550 (-10.6%)
716,202 (-6.2%)
2009 534,062 7,000 541,062
(232.6%) 194,590 79,962 24,348 200,686 66,643 566,229 (2.3%)
1,107,291 (54.6%) 2010 653,138 25,500 678,638
(25.4%) 218,866 85,575 15,513 186,166 60,592 566,712
(0.1%) 1,245,350 (12.5%) 2011 655,413 49,500 704,913
(3.9%) 228,943 97,284 14,731 163,724 51,034 555,716 (-1.9%)
1,260,629 (1.2%) 2012 657,384 68,500 725,884
(3.0%) 263,418 116,188 10,271 147,669 45,159 582,705 (4.9%)
1,308,590 (3.8%) 2013 751,151 91,500 842,651
(16.1%) 250,104 127,937 10,214 148,698 39,816 576,769 (-1.0%)
1,419,420 (8.5%) 2014 752,630 98,000 850,630
(0.9%) 232,796 137,624 6,101 141,670 40,990 559,181 (-3.0%)
1,409,812 (-0.7%) 2015 828,421 100,400 928,821
(9.2%) 242,593 141,659 5,301 162,133 44,050 595,736
(6.5%) 1,524,558 (8.1%) Source: HKMA.
CHART B1
Proportions of Hong Kong dollar debt issuance activities (by type of issuers)
Source: HKMA.
CHART B2
Proportions of outstanding Hong Kong dollar debt instruments (by type of issuers)
Source: HKMA.
Notes:
1. Authorized institutions include licensed banks, restricted licence banks and deposit-taking companies.
2. Multilateral Development Banks (MDBs) refer to the Asian Development Bank, the Council of Europe Development Bank (formerly known as the Council of Europe Social Development Fund), the European Company for the Financing of Railroad Rolling Stock, the European Investment Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the International Bank for Reconstruction and Development, the International Finance Corporation, the African Development Bank, the Nordic Investment Bank, and the CAF - Development Bank of Latin America. Income earned on Hong Kong dollar debt securities issued by the MDBs is exempt from profits tax.
3. Statutory bodies and government-owned corporations include Bauhinia Mortgage-backed Securities Limited, The Hong Kong Mortgage Corporation, Airport Authority Hong Kong, Hong Kong Link 2004 Limited, Kowloon-Canton Railway Corporation, MTR Corporation Limited, Hong Kong Interbank Clearing Limited, Urban Renewal Authority, Hong Kong Housing Society, and the Hong Kong Science and Technology Parks Corporation. It should be noted that while the issuers are public bodies in the legal sense, they are typically considered as non-public issuers by the market. Hence, they are categorised under the “non-public”
segment in the tables above.
4. Figures between 1998 and 2014 have been revised.
5. Figures may not add up to total because of rounding.
