May 14, 2015 / 7:52 AM / 4 years ago

CNH Tracker-High-yield dim sum bonds outperform on improved risk appetite

HONG KONG, May 14 (Reuters) - Hong Kong’s offshore yuan bond market rallied strongly in the past month, with the high-yield sector taking the lead, thanks to improved risk appetite and easing of tight liquidity that has lasted for months.

The rally is likely to continue as China gets deeper into a policy easing cycle and more stimulus measures are expected to shore up the world’s second-largest economy, market players say.

Yield of high-yield dim sum bonds dropped 70 basis points (bps) in April, its biggest monthly decline for two years. That compared to 35 bps drop for the whole dim sum bond market.

The average yield of high-yield and non-rated bonds with an average duration of 1.95 years fell to 6.3 percent on Thursday from 7.25 percent seen on April 1, according to HSBC dim sum bond index.

“As long as the interest rate cut cycle in China continues, the high-yield sector is likely to continue to outperform the market until its gap with the investment grade sector narrows to recent tights like August 2014 or April 2013,” said Crystal Zhao, a fixed-income analyst at HSBC.

The People’s Bank of China (PBOC) cut interest rates for the third time in six months on Sunday, in a bid to lower companies’ borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.

Rate cuts and reductions in banks’ reserve requirement ratios have helped inject more money into the economy and relieved tight liquidity both in China’s domestic market and offshore yuan market.

The interbank lending rate in Hong Kong’s yuan market slipped to its lowest level in seven months. One-week lending rate stood at 2.9 percent on Thursday, compared to an all-time high of 7.85 percent in February.

Confidence in dim sum bonds sold by Chinese property companies has also rebounded after waning earlier in the year after developer Kaisa Group Holdings missed a deadline to pay a dollar bond coupon.

As an example, China New Town Development managed to sell a 1.3 billion yuan ($209.53 million) three-year dim sum bond priced at 5.5 percent on April 29. It was the first high-yield bond from the Chinese developer sector so far this year.

“We’ve seen more demand to buy property bonds since April. We recommend buying single B names and our top picks are Evergrande and Powerlong,” Zhao said.


* China’s finance ministry will auction a total of 28 billion yuan ($4.51 billion) of renminbi denominated bonds in Hong Kong this year, a statement posted on the ministry’s website Tuesday said.

* China and Belarus renewed their standing currency swap arrangement worth 7 billion yuan ($1.13 billion) for three years, the People’s Bank of China said on Monday.

* The yuan will trade around 6.21 a dollar in one month, 6.21 in six months and 6.17 by end-April 2016, a Reuters poll showed on Friday. It compared to 6.23, 6.24 and 6.20 in a poll in April.

* ICAP plc, a leading markets operator, announces on Thursday it had launched the ICAP CNH Hub, a currency-specific portal which pulls together offshore yuan data from various services within the group to offer a single, consolidated and holistic view of the market.


Dim sum bond market saw strong rally in the past month:

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$1 = 6.2045 Chinese yuan renminbi Editing by Kim Coghill

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