Date
18 October 2017
​​Gary Leung (left), BOCHK deputy general manager of global markets, says ibonds remain attractive despite a looming increase in interest rates. Photo: EJ Insight
​​Gary Leung (left), BOCHK deputy general manager of global markets, says ibonds remain attractive despite a looming increase in interest rates. Photo: EJ Insight

New ibond issue attractive despite looming rate hike

​A fourth batch of inflation-linked government notes (code: 4222), commonly known as ibond, is expected remain attractive despite a looming interest rate increase in the United States, Bank of China (Hong Kong) Ltd. said Friday.

“The unemployment rate and inflation are not the only factors to be considered in any decision to hike interest rates. The Federal Reserve will also consider other indicators such as the labor force participation rate,” Gary Leung, BOCHK deputy general manager of global markets, told reporters. 

The labor force participation rate fell to 62.5 percent in April, a record low since the Lehman Brothers crisis in 2008, he said.

“So, even if US interest rates go up 2 percent in mid-2016, ibond4 investors can still enjoy a 2 percent premium given a 4 percent coupon based on Hong Kong inflation rate,” he said.

A three-year ibond offering will remain at HK$10 billion (US$1.29 billion), with a coupon payout of either a floating rate, depending on the inflation rate of the previous six months, or a fixed rate at 1 percent, ​whichever is higher.

HSBC Holdings Plc. (00005.HK) and BOCHK (02388.HK) are the joint arranger of the fourth tranche of ibonds.

The bonds offer half-yearly payments linked to inflation during the previous six months, the Hong Kong Monetary Authority said Friday.

They will be sold at HK$10,000 per lot and will be open for subscription from July 23 to July 31. The issue date is Aug 11 and the bonds will be available for trading the next day.

Leung expects about 14 percent return from the new issue. “It is attractive compared with other alternative fixed income products.”

He said Hong Kong’s inflation rate is not expected to fall significantly as two major components — food prices and rental prices — remain high.

Newcomer​s

Alan Ng, director of business development and investment management at Convoy Asset Management Ltd. expects an enthusiastic market response to the new ibond, especially from investors who prefer low-risk, high-return products.

However, even if inflation falls below 4 percent this year, it will be difficult for the new ibond to match the 4 percent return of of its predecessor, Ng said in an e-mailed statement.

The first batch of ibonds were the best performer with about 6 percent return on the first day.

However, in terms of average annual return, the third batch delivered the best showing at 9.5 percent just a year after launch.

​​Howard Lee, HKMA executive director for monetary management, said one of the objectives of ibond issuance is to step up the development of the domestic bond market.

BOCHK’s Leung said more retail investors participated in the bond market last year.

“We have also noticed that ibonds can help attract retail investors to bond funds and other fixed income products.

The first batch of ibonds, launched in July 2011, paid interest at 4.02 percent, the HKMA said in a statement on July 14.

The third batch (4218) listed last June, drew 520,823 investors while the second batch (4214) attracted 332,467 in 2012. The inaugural issue (4208) had just 155,835 subscribers in 2011.

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AM/JP/RA

Ayishah Ma is a financial reporter on Greater China issues.

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