Hong Kong’s old playbook on inflation bonds encounters new risk factors. Should retail investors worry?
- Several events surround Hong Kong’s impending sale of inflation-linked bonds, notably risks tied to the US presidential election
- Alternative safe bets in time deposits, money-market instruments have failed to protect retail investors from erosion in purchasing power
For one, the government is selling the retail notes at a time when its credit ratings have suffered through a bitter US-China trade war and anti-government protests over the past two years. For another, consumer prices have also declined in recent months as the economy slipped into its worst recession on record. What with the timing, right in the middle of the US presidential election, whose outcome may be “extremely contested” and roil markets.
All these are bringing up new challenges for mom-and-pop investors who are not accustomed to the “new normal” of super-easy monetary policy that has pushed many bond yields to below zero.
“The unprecedented volatility in global financial markets, with the US presidential election approaching, is likely to benefit the iBonds’ sales,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai. “To most investors, it’s still a near-zero-risk investment.”
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Consumer prices in the city have weakened considerably as can be expected during a slowdown. Efforts to reflate the economy by firing up spending could induce inflation, making these iBonds a good insurance against any erosion in quality of life.
In the past six issues totalling HK$60 billion, iBonds have paid out semi-annual interest or coupons between 1.02 per cent and 6.08 per cent, depending on the price cycles. Hongkongers can draw some comfort in iBond’s minimum yields against the city’s official inflation forecast of an average of 2.5 per cent for 2021 to 2024.
Globally, central banks have flooded financial markets with a deluge of liquidity to overcome the impact of Covid-19 pandemic. Federal Reserve officials last month signalled interest rates are likely to stay near zero through 2023. This means there is little room for Hong Kong’s monetary authority to raise rates, under its currency-peg regime.
The 2 per cent minimum yield is also superior when compared with other low-risk alternatives. Hong Kong-based lenders offer less than 0.2 per cent interest annually on time deposits. Over the past decade, the one-year deposit rate ranged from 0.2 to 0.3 per cent, while the annual inflation rate was between 0.4 per cent and 5.3 per cent.
“The iBond is basically a safe investment,” said Kevin Leung, executive director of investment strategy at Haitong International Securities. “It would probably attract people who are older, more conservative, who usually don’t trade stocks and just let their money sit in bank deposits.”
Riskier assets such as stocks, real estate and commodities are also regarded by some investors as indirect inflation hedges, but the correlation is highly unstable, and are less effective insurance in slower-growth, faster-inflation economic conditions.
The economic slump has brought other ill-effects, including a knock on Hong Kong’s political stability and its creditworthiness. The city has become a pawn in the bigger US-China spat. Several rounds of stimulus to shore up economic activity since the viral outbreak have chipped into its fiscal reserves.
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