Market Summary

Yield Movements

Hong Kong, China’s local currency (LCY) bond yield curve exhibited mixed movements between 15 June and 15 August. The curve hardly moved at the shorter-end but fell an average of 8 basis points (bps) for bonds with maturities of 10 years or more, shifting the curve slightly downward at the longer-end. The yield movements of Hong Kong, China’s LCY medium- to long-term government bonds broadly tracked the rate movements of the corresponding United States Treasuries during the review period. For both economies, risk-off sentiment drove long-term government bond yields down as the spread of the delta variant threatened nascent economic recovery. The spread between the 2-year and 10-year yields narrowed to 109 bps on 15 August from 118 bps on 15 June. 

Size and Composition

Hong Kong, China’s outstanding LCY bonds totaled HKD2,426.9 billion (USD312.5 billion) at the end of June. The LCY bond market contracted 0.8% quarter-on-quarter in the second quarter 2021, reversing the 1.7% quarter-on-quarter gain in the previous quarter. The contraction in the stock of outstanding bonds was driven by a decline in the corporate bond segment that outpaced the growth in the government bond segment. Government bonds accounted for 50.1% of total LCY bonds outstanding at the end of June. On a year-on-year basis, growth in Hong Kong, China’s LCY bond market moderated to 7.0% in the second quarter of 2021 from 8.4% in the previous quarter.

Policy, Institutional, and Regulatory Developments

On 5 August, the Hong Kong Monetary Authority announced that the countercyclical buffer (CCyB) would remain unchanged at 1.0%. The Hong Kong Monetary Authority noted that while there have been initial signs of recovery, the economy continued to face uncertainties driven by the global pandemic. Thus, holding the CCyB steady and monitoring the economic situation for a few more quarters was deemed appropriate. The CCyB is an integral part of the Basel III regulatory capital framework designed to increase the resilience of the banking sector during periods of excess credit growth.