CNH Tracker-Higher yields unlikely to hit appetite for dim sum bonds

Thu Feb 13, 2014 1:46am EST

By Michelle Chen
    HONG KONG, Feb 13 (Reuters) - Yields on offshore yuan bonds
are likely to keep rising, yet the market should remain
attractive to global investors given the interest rate returns
and the currency's strength relative to other emerging market
ones. 
    The so-called dim sum bond market had a record hot January,
as more Chinese companies sought cheaper money than they could
find in the mainland. 
    The nearly $100 billion market last month saw issuance of 39
billion yuan ($6.43 billion), up 52 percent from a year earlier,
according to Thomson Reuters data.
    Along with big supply came increasing yields, which meant
lower bond prices. The average yield is up 12 basis points (bps)
so far this year, according to HSBC's dim sum bond index. By
comparison, the average yield for Asian local currency bonds
tracked by HSBC has risen 4 bps in the same period.
    Some individual dim-sum issuers have seen a sizable rise in
yields. Among them is China's Ping An Insurance, the country's
second-largest insurer by market capitalisation, which tapped
the market three times in recent months. 
    Ping An's latest sale, in January, was priced at 4.15
percent and 4.95 percent for the three-year and five-year
tranches, respectively. That compared with 4 percent and 4.75
percent sold in November.
    Market participants expect further increases in yields given
a strong pipeline of anticipated issues. Pushing up yields are
continuing efforts by Chinese companies to dodge the expensive
onshore market at a time that foreign investors - now equipped
with broader yuan investment channels - have more bargining
power to ask for higher yields.
    The approval of Renminbi Qualified Foreign Institutional
Investor (RQFII) has quickened recently and two exchange-traded
funds (ETFs) tracking onshore government debt are expected to be
launched soon, providing exposure to the mainland markets.
    Chinese asset managers CSOP and E Fund Management have said
they intend to sell ETFs tracking the ChinaBond 5-Year Treasury
Bond Index and Citi Chinese Government Bond 5-10 Years Index,
respectively, kicking off the first of such product launches.
 
    As an indicator of the yield differentials in the two
markets, the spread of China Finance Ministry's two-year bonds
in China and Hong Kong widened to a two-year high at nearly 190
bps at the end of last year. Analysts say that the differential
may have peaked.
    Though climbing yield levels will bring capital losses to
investors, the other two factors that contribute to total dim
sum bond returns - FX gains and interest rate accruals - should
more than offset these losses.
    "Amid a strong USD and rising global yields, renminbi bonds
are safe-haven assets that offer solid returns and relatively
low volatility," said Becky Liu, an analyst at Standard
Chartered.  
    Liu forecasts total returns from holding two-year dim sum
government bonds at 2.7 percent in U.S. dollar-terms this year,
assuming yields rise by 50-60 bps, while government bonds with
the same tenor in other major currencies are all expected to
suffer losses, including in the U.S., Japan, UK, Germany,
France, and Australia.RECENT STORIES:
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