Date
20 August 2017
Inflation-linked iBonds may face stronger competition from other interest-bearing investments as interest rates rise. Photo: HKEJ
Inflation-linked iBonds may face stronger competition from other interest-bearing investments as interest rates rise. Photo: HKEJ

Govt mulls 5th batch of iBonds

Financial Secretary John Tsang is widely expected to issue another HK$10 billion worth of iBonds, which are linked to inflation, in his budget speech at the Legislative Council on Feb. 25, Sing Tao Daily reported Wednesday.

Tsang first rolled out a HK$10 billion batch of iBonds in the budget speech for the 2011-2012 financial year.

It was an attempt to promote development of the local retail bond market and to provide citizens with an investment choice to combat the erosion of their buying power by inflation.

Although interest rates are expected to start rising in the middle of this year, which should push the inflation rate down gradually, the government foresees a slower pace of rate hikes by the United States.

The consequence is a prolonged period of low interest rates, making the interest offered by iBonds still attractive to local investors seeking safe and stable returns.

When the first batch of iBonds was rolled out, it was just 0.32 times oversubscribed, but prices surged 6 percent on the first day of trading, giving investors a net profit of HK$670 per iBond.

Over the three-year tenure of the first batch of iBonds, the total interest paid out was HK$1,355, equivalent to an annualized return of 4.5 percent.

The second batch of iBonds was four times oversubscribed, and the third, nearly three times. The fourth batch, rolled out last year, was two times oversubscribed.

Professor Terence Chong, executive director of the Institute of Global Economics and Finance at the Chinese University of Hong Kong, said as it is the public consensus that interest rates are trending upward, the demand for iBonds will inevitably be affected, as the returns offered by instruments such as fixed deposits are likely to become more attractive.

That said, Chong does not see iBonds being undersubscribed, based on the experience of previous issues.

If the interest rate being offered is maintained at about 3 percent, it will attractive enough for investors seeking a stable return, he said.

Billy Mak, associate professor of finance at the Hong Kong Baptist University, said iBonds have lost their luster sinced they made their debut, but the government is still keen on them, as they still serve the purpose of promoting the development of the local retail bond market.

– Contact us at [email protected]

EL/AC/FL

EJI Weekly Newsletter

Please click here to unsubscribe