Market Summary

Yield Movements

Between 15 June and 15 August, Hong Kong, China’s local currency (LCY) government bond yield curve inverted, as yields rose for bonds with maturities of less than 2 years but fell for bonds with longer tenors. The yield curve’s inversion started at the end of July and deepened toward the end of the review period. Hong Kong, China’s LCY bond yield movements during the review period tracked those of United States (US) Treasury yields. Rate hikes by the US Federal Reserve in June and July and the subsequent base rate adjustments by the Hong Kong Monetary Authority created upward pressure on yields at the shorter-end of government bond yield curves in both the US and Hong Kong, China. The yield curve inversion also reflected lingering weakness in Hong Kong, China’s economy, which experienced consecutive contractions in the first two quarters of 2022.  

Size and Composition

Hong Kong, China’s LCY bond market expanded 2.1% quarter-on-quarter (q-o-q) and 7.1% year-on-year in the second quarter (Q2) of 2022 to reach a size of HKD2.6 trillion (USD331.3 billion) at the end of June. Growth in the government bond segment dropped to near-zero in Q2 2022 from 3.3% q-o-q in the previous quarter. Meanwhile, the corporate bond segment registered a 4.4% q-o-q expansion in Q2 2022, reversing the 1.9% q-o-q decline in the preceding quarter. Robust issuance underpinned the expansion in corporate bonds. In terms of composition, Hong Kong, China’s LCY bond market had a slightly higher share of government bonds (52.4%) than corporate bonds (47.6%) at the end of June. 

Policy, Institutional and Regulatory Developments

On 25 June, the Bank for International Settlements (BIS) announced a Renminbi Liquidity Arrangement developed with the People’s Bank of China to provide liquidity to central banks through a new reserve pooling system. The Hong Kong Monetary Authority is among the initial group of central bank participants, which includes the People’s Bank of China, Bank Indonesia, the Bank Negara Malaysia, the Monetary Authority of Singapore, and the Banco Central de Chile. To set up the reserve pool placed with the BIS, each participating central bank contributed a minimum of CNY15.0 billion. The arrangement complements existing BIS liquidity facilities in providing liquidity access to contributing central banks in times of market volatility.