Market Summary

Yield Movements

Between 31 August and 15 October, local currency (LCY) government bond yields in Hong Kong, China fell slightly for shorter-dated tenors and jumped for medium- to longer-dated tenors. Yield movements tracked the movements of United States (US) Treasury yields as the Hong Kong dollar is pegged to the US dollar. Hong Kong, China's yield curve has been inverted since the second quarter (Q2) of the year. The inverted yield curve reflected expectations of an economic downturn in Hong Kong, China. Hong Kong, China's gross domestic product growth contracted 2.9% year-on-year (y-o-y) in the third quarter (Q3) of 2019 amid months of political unrest. In quarter-on-quarter (q-o-q) seasonally adjusted terms, Hong Kong, China's GDP contracted 3.2% q-o-q in Q3 2019 following a 0.5% q-o-q drop in Q2 2019, indicating that the economy has fallen into a technical recession.

Size and Composition

Hong Kong, China's LCY bonds outstanding dropped slightly to HKD1,954.7 (USD249.4) in Q3 2019 from HKD1,955.5 billion (USD250.4) in Q2 2019. The 0.04% q-o-q dip in Q3 2019 was smaller than the 0.2% q-o-q drop in the prior quarter. Annual growth rose to 2.1% y-o-y in Q3 2019 from 1.4% y-o-y in Q2 2019 due to stronger growth in both government and corporate bonds. Government bonds accounted for 59.9% of LCY bonds outstanding in Q3 2019.

Policy, Institutional and Regulatory Developments

In August, the government announced fiscal support measures worth HKD19.1 billion to aid citizens and businesses affected by the economic downturn. In September, the government-owned Hong Kong Mortgage Corporation introduced a relief measure targeted to small and medium-sized enterprises facing cash flow pressure. On 14 October, the Hong Kong Monetary Authority lowered the countercyclical capital buffer from 2.5% to 2.0%, releasing capital that had previously built up in the banking sector. The move injected an estimated HKD200 billion-HKD300 billion into the economy.