Market Summary

Yield Movements

Between 28 February and 15 May, local currency (LCY) government bond yields in Hong Kong, China fell across all tenors, shifting the yield curve downward. Hong Kong, China's yield curve was inverted at the beginning of the review period with the spread between the 2-year and 10-year yields at -4 basis points. The yield curve had normalized by the end of the review period, with the spread between 2-year and 10-year bonds back in positive territory at 24 basis points. Hong Kong, China's government bond yields tracked United States Treasury yields during the review period. Falling yields also reflected the contraction of Hong Kong, China's economy. The economic recession deepened in the first quarter (Q1) of 2020 as the onset of the coronavirus disease (COVID-19) disrupted the economy already battered by the combined impacts of trade tensions between the People's Republic of China and the United States as well as prolonged political unrest.

Size and Composition

Hong Kong, China's LCY bonds outstanding amounted to HKD2,255.4 billion (USD291.0 billion) at the end of March after a 0.5% quarter-on-quarter (q-o-q) contraction in Q1 2020. The drop in LCY bonds outstanding stemmed from a contraction in the government bond segment combined with tepid growth in the corporate bond segment. On a year-on-year basis, growth slowed to 0.3% in Q1 2020 from 1.8% in the fourth quarter of 2019. Government bonds accounted for a 51.9% share of the total LCY bonds outstanding at the end of March.

Policy, Institutional and Regulatory Developments

On 16 March, the Hong Kong Monetary Authority reduced its countercyclical buffer to 1.0% from 2.0% amid worsening economic conditions brought about by the COVID-19 outbreak. The move was intended to release additional funds that would allow banks to extend credit to support financing needs in the domestic economy, particularly for sectors and individuals affected by the downturn.