Market Summary

Yield Movements

Between 15 June and 15 August, local currency (LCY) bond market yields in Hong Kong, China fell across all tenors, shifting the yield curve downward. Hong Kong, China's government bond yields tracked United States (US) Treasury yields during the review period. Declining yields also reflected the continuing contraction in Hong Kong, China's economy. Based on advanced estimates, Hong Kong, China's gross domestic product plunged 9.0% year-on-year (y-o-y) in the second quarter (Q2) of 2020. Heightened downside risks, brought about by the combined effects of political unrest, the coronavirus disease, and worsening trade and political tensions between the People's Republic of China and the US, was exacerbated by the new security law that came into effect in Q2 2020.

Size and Composition

Hong Kong, China's LCY bond outstanding reached HKD2,267.6 billion at the end of June, up from HKD2,255.5 billion at the end of March. The 0.5% quarter-on-quarter (q-o-q) growth in Q2 2020 reversed the 0.5% q-o-q decline in Q1 2020. The q-o-q growth was primarily driven by a 2.3% q-o-q rise in the corporate bond segment as the government bond segment contracted 1.1% q-o-q in Q2 2020. Government bonds accounted for a 51.0% share of total LCY bonds outstanding at the end of June.

Policy, Institutional and Regulatory Developments

On 7 July, the Hong Kong Monetary Authority (HKMA) decided to hold the countercyclical capital buffer (CCyB) at 1.0%. The HKMA noted that the latest data based on Q1 2020 indicators signal a higher CCyB at 2.25%. However, the HKMA gauged that the economic recovery will be protracted given the high level of uncertainty. The HKMA decided to hold the CCyB steady at 1.0% and to continue monitoring the economic situation.