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Market Summary
Yield Movements

The Hong Kong, China yield curve steepened considerably in the second quarter of the year from the previous quarter, as yields declined at the short-end and rose from the 3-year tenor through the rest of the curve. Yields on 3-year notes rose 16 basis points, those on 5-year notes increased 45 basis points, and yields on 10-year notes increased 69 basis points. The steepened curve is reflected by the spread between 2- and 10-year Exchange Fund paper, which stood at 200 basis points as of end-June compared to 119 basis points as of end-March.

Size and Composition

As of end-June 2009, the amount of Exchange Fund bills and notes (EFBNs) outstanding reached HKD288.42 billion, almost double the EFBN stock in June 2008. The rise in the outstanding amount of EFBNs is due to continued issuance of Exchange Fund bills by HKMA to meet strong bank demand. The corporate sector of the bond market was relatively subdued in the first quarter. The amount of corporate bonds outstanding grew 1.3% q-o-q and declined by a slight 0.7% y-o-y.

Turnover

EFBN trading volume (or turnover)   in the first half of the year totaled HKD13.319 trillion, which is more than double the HKD6.4 trillion posted in the first half of 2008. Corporate trading volume in June amounted to HKD12.83 billion--more than three times the March figure and almost twice the January trading volume of HKD6.84 billion.

Policy, Institutional and Regulatory Developments

Cross-Border Payment Arrangements between the People’s Republic of China (PRC) and Hong Kong, China

In February 2009, the People’s Bank of China (PBOC) and HKMA signed a memorandum of understanding on the establishment of multi-currency, cross-border payment arrangements.

Yuan Trade settlement

The People’s Republic of China (PRC) and Hong Kong, China signed an agreement in late June to permit the yuan to be used in settling cross-border trade transactions.

Lawmakers Approve HKD100 Billion Bond Sale

Hong Kong, China’s legislative council in July approved a new HKD100 billion debt issue program that aims to provide additional depth to the Hong Kong, China bond market through the issuance of sovereign paper.