Market Summary

Yield Movements

Between 1 June and 15 August, Hong Kong, China's local currency (LCY) government bond yield curve rose at the shorter-end but dropped for tenors with maturities of 2 years and longer. The yield curve has been inverted since the middle of April, when the 10-year yield fell below the 2-year rate by 2 bps. By the end of the review period, the gap had widened, with the 2-year yield outpacing that of the 10-year yield by 14 bps. The yield curve's inversion reflected heightened uncertainties brought about by political unrest and expectations of an economic slowdown. In August, the Hong Kong Monetary Authority (HKMA) lowered its base rate by 25 bps to 2.5% after the US Federal Reserve cut its key benchmark rate by 25 bps.

Size and Composition

Hong Kong, China's LCY bonds outstanding declined to HKD1,955.5 billion in the second quarter (Q2) of 2019 from HKD1,959.9 in the previous quarter. The 0.2% quarter-on-quarter drop in Q2 2019 reversed the 0.5% quarter-on-quarter growth in the previous quarter, driven largely by a contraction in corporate bonds outstanding. Annual growth weakened to 1.4% year-on-year in Q2 2019 from 3.7% in the first quarter due to slower growth of both government and corporate bonds. The bond market remains dominated by government bonds, which accounted for 59.5% of LCY bonds outstanding in Q2 2019.

Policy, Institutional and Regulatory Developments

On 9 July, the HKMA decided to maintain the countercyclical capital buffer (CCyB) at 2.5%. In its press statement, the HKMA noted that the latest data signals a lower CCyB at 1.75% due to the narrowing of the credit-to-GDP gap, which indicated a slowdown in loan growth. However, after considering other factors, including the recovery of residential property prices and banking sector and economy-wide risks, the HKMA decided that holding the CCyB steady at 2.5% was more appropriate to provide an additional buffer should the systemic risks crystallize in the future.