Overview of global bond markets
The global economy in 2017 saw a rebound with subdued inflation. In developed economies, sovereign bond yields gradually picked up from the third quarter onwards. Sovereign bond yields in emerging markets also increased in tandem with the US Treasury yields after September 2017 (Chart 1).
In the US, the Federal Reserve raised interest rates three times and announced a gradual normalisation of its balance sheet, and the new administration would pursue tax reforms which may widen the fiscal deficit. Short-term US Treasury yields rose while long-term yields remained mostly stable, resulting in a flattening of the yield curve. In Europe, the European Central Bank kept interest rates unchanged during the year, and announced a slowdown in the pace of asset purchases in 2018 amid a pick up in economic growth. Government bond yields of major European economies increased mildly in 2017. In Asia, improved market sentiment and stronger growth momentum boosted yield- searching behaviour, although yields of Asian
CHART 1
Average borrowing costs in developed and emerging markets
1.50 5.50
5.25
5.00
4.75
4.50 1.25
1.00
0.75
0.50
% %
BofA Merrill Lynch G7 Govt (LHS) (%) ICE EM Sovereign Bond Index (RHS) (%)
Jan 17 Apr 17 Jul 17 Oct 17
Notes:
1. Average yields of the BofA Merrill Lynch G7 Government index are used as proxies to the yield levels of developed markets.
2. Average yields of ICE emerging market sovereign bond index are used as proxies to the yield levels of emerging markets.
Sources: Thomson Reuters, Bloomberg and Bank of America Merrill by the Financial Infrastructure Department
Faster economic growth and subdued inflation globally supported global bond
markets in 2017. While the US Federal Reserve raised interest rates three times and began to reduce its balance sheet, the US Treasury yield curve did not rise sharply. In Hong Kong, the total issuance amount of Hong Kong dollar debt instruments
increased, mainly attributable to increased issuance of Exchange Fund Bills and Notes. The Government also issued the third sukuk under the Government Bond Programme to support the development of the Islamic bond market.
The Hong Kong Debt market in 2017
Hong Kong Debt Market Review
A massive amount of funds have flowed into the Hong Kong dollar since the global financial crisis, keeping domestic interest rates at low levels. The Hong Kong dollar interbank interest rates stayed soft in the first eight months of 2017, before facing more upward pressure towards the end of the year with the one month Hong Kong Interbank Offered Rate (HIBOR) increasing to about 1.2% per annum. The rise was driven mainly by initial public offering-related and year-end funding demand. The Government bond yield curve also shifted upwards in the latter part of 2017.
Nonetheless, ample liquidity and subdued inflation supported the demand for bonds. Hong Kong dollar debt issuance increased for the ninth consecutive year to HK$3.34 trillion, representing an increase of 9.3% over 2016. The increase was largely due to the increased issuance of Exchange Fund Bills and Notes.
Overseas entities
Debt issuance by overseas entities tends to be opportunistic in nature. Although Hong Kong dollar interest rates, such as HIBOR and Government Bond yields, were lower than their US dollar counterparts, the US dollar/HK dollar basis spreads were in negative territory for most of the year (Chart 2). As such, there was less incentive for overseas issuers to issue Hong Kong dollar bonds. This led to a 18%
decline in bond issuance in Hong Kong by overseas issuers (mainly financial institutions, corporates, and multilateral development banks) in 2017 as
compared with 2016.
CHART 2
Key tenors of USD/HKD basis spreads
10 5 0 -5 -10 -15 -20 -25 -30 -35 -40 Basis points
2-year 3-year 5-year 10-year
Jan 17 Apr 17 Jul 17 Oct 17
Source: Bloomberg.
Local corporates and authorized institutions (AIs)
Strong economic growth supported the demand for corporate bonds. However, from the supply side, local corporates shrank their funding scale in the local debt market with the issuance volume
decreasing by 18% from 2016. This suggests that an increase in US Treasury yields has the effect of reducing issuance in corporate bonds in emerging Asia markets. Credit spreads of Hong Kong dollar bonds over US Treasury yields trended downwards in the first half of the year before widening
later (Chart 3). Correspondingly, “pre-refinancing”
activities were brisk in the first half taking advantage of the low local interest rates, but subsided
afterwards. On the other hand, fund-raising activities by AIs increased by 2.5% year-on-year, as AIs tried to secure funding for their regular shorter term funding needs through the issuance of Certificates of Deposit and notes.
CHART 3
HKD yield spreads with the US 10-year Treasury yield
%
-1.6 -1.2 -0.8 -0.4 0.0 0.4 0.8 1.2 1.6
Avg Yield of HKD Non-Sovereign Bond - US 10-year Treasury Yield HK 10-year Govt Bond Yield - US 10-year Treasury Yield
Jan 17 Apr 17 Jul 17 Oct 17
Sources: HKMA, Bank of America Merrill Lynch and Bloomberg.
Downgrade of Hong Kong’s credit rating
In May 2017, Moody’s downgraded Hong Kong’s credit rating from Aa1 to Aa2. In September, Standard and Poor’s also downgraded Hong Kong’s credit rating from AAA to AA+. These downgrades were seen to be related to the credit rating of Mainland China, rather than a worsening of Hong Kong’s credit fundamentals. Spreads of Hong Kong dollar corporate bonds over US Treasuries did not record a significant increase and the downgrades did not seem to have any material impact on the intention and ability of Hong Kong corporates to issue bonds.
Other developments
The HKMA and the People’s Bank of China jointly launched the Bond Connect in July 2017, with Northbound Trading coming into operation in the first phase, enabling overseas institutional investors to invest in the interbank bond market in Mainland China, through the cross-border financial
the Mainland bond markets, using common practices in international financial markets. Operation of the Northbound Trading has been smooth, with over 240 investors participating and daily turnover averaging RMB2 billion up to the end of 2017.
The Ministry of Finance has issued renminbi sovereign bonds in Hong Kong every year since 2009. In October 2017, it issued its first US dollar sovereign bonds in Hong Kong, with a total issuance amount of US$2 billion (US$1 billion in 5-year tenor and the remaining US$1 billion in 10-year tenor).
Government Bond (GB) Programme
The HKMA continued to implement the GB Programme to promote the further and sustainable development of the local bond market. At the end of 2017, there were a total of 13 issues of institutional bonds outstanding with total amount reaching HK$78.9 billion.
Retail bonds
During the year, the Government issued the second batch of Silver Bond. Silver Bond is an
inflation-linked bond with a minimum annual interest rate of 2% and targets Hong Kong residents aged 65 or above. The size of the 2017 issuance was
HK$3 billion, with a tenor of three years. The number of valid applications was 44,842, with total
subscription amounting to nearly HK$4.2 billion. The success demonstrated the immense potential of the silver market for the financial sector to tap into.
On the other hand, the issuance of iBond was suspended by the Government in 2017, owing to the subdued inflation and rising interest rates which diminished the bond’s attractiveness. The iBond was launched in 2011 amid the persistently low interest rate environment and high inflation rate, and aimed to provide Hong Kong residents with an investment
Islamic bonds
In February 2017, the Government successfully offered its third US dollar denominated sukuk with an issuance size of US$1 billion and a tenor of 10 years (subsequent to two sukuk issuances in 2014 and 2015 respectively). This was a landmark transaction as Hong Kong was the first AAA-government to launch a sukuk with a 10-year tenor. This latest sukuk has extended the yield curve, setting an important new benchmark for potential issuers in Hong Kong and globally. Despite the uncertain global environment and the longer tenor, the sukuk still saw strong demand, attracting orders of US$1.7 billion. The 10-year tenor had also attracted new investors which had not participated in the previous two sukuk issuances. At the end of 2017, three US dollar sukuk issues, each with an issuance size of US$1 billion, were outstanding.
Looking ahead
Given the normalisation of monetary policies by major central banks, the costs of debt financing could increase and this may have a bearing on Hong Kong’s debt market in 2018. Nonetheless, there are favourable developments which may provide support to the local debt market. For instance, the admission of Hong Kong as a member of the Asian
Infrastructure Investment Bank in 2017 may bring new infrastructure financing opportunities. In addition, as announced in the 2017 Policy Address, the Government plans to issue green bonds to encourage investors to finance their green projects through Hong Kong’s capital markets. The HKMA will also continue to support the development of the Hong Kong dollar debt market through the
implementation of the GB Programme, and continue to enhance the Bond Connect Northbound Trading operations and explore potential areas of further development of the Bond Connect.
APPENDIX (see notes)
Issuance of Hong Kong dollar debt instruments (in HK$ 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%)
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%) 239,958 141,659 5,301 157,948 43,351 588,216
(5.2%) 1,517,037 (7.6%) 2016 963,098 102,800 1,065,898
(14.8%) 273,146 153,414 10,550 177,558 50,010 664,678
(13.0%)
1,730,576 (14.1%) 2017 1,048,479 106,400 1,154,879
(8.3%) 242,649 160,639 9,854 180,500 53,647 647,289
(-2.6%)
1,802,168 (4.1%) Source: HKMA.
CHART B1
Proportions of Hong Kong dollar debt issuance activities (by type of issuers)
0 20 40 60 80 100
%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Exchange Fund Authorized Institutions MDBs
Statutory bodies & government-owned corporations Government
Local corporates Non-MDB overseas issuers
Source: HKMA.
CHART B2
Proportions of outstanding Hong Kong dollar debt instruments (by type of issuers)
0 20 40 60 80 100
%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Exchange Fund Authorized Institutions MDBs
Statutory bodies & government-owned corporations Government
Local corporates Non-MDB overseas 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.
