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CNH Tracker – Dim sum bond appetite likely to return

by on September 27, 2012 8:14 am BST
 

Thu Sep 27, 2012 4:14am EDT

By Michelle Chen
    HONG KONG, Sept 27 (Reuters) - Fund outflows from investment
grade (IG) dim sum bonds on tight offshore yuan liquidity have
pushed up IG dim sum bond yields to almost match onshore rates,
a level that fund managers and analysts think is an attractive
buy. 
    They also like some of the high yield (HY) bonds with better
fundamentals or bonds from counter-cyclical industries for
richer yields, given this category has been ramped up by the
quantitative easing policies of some global central banks.
    Raymond Gui, senior portfolio manager at Asian fixed-income
manager Income Partners, said the convergence of onshore and
offshore rates has removed the major hurdle for IG yuan bonds'
upside performance, with inviting entry rates for the asset
sub-class.
    "The aggregate 3.5-4 percent yield investors can earn from a
diversified portfolio of investment grade dim sum bonds with an
average duration of two years or less is attractive in this
low-yield world," he said, noting the average yield for a dollar
equivalent could be below 2 percent.
    This suggests that in the search for higher yields,
investors would have to take more USD duration risk. Duration
risk is of greater concern as US Treasury yield is already very
low and is likely to rise in the medium term, cutting the
capital value of the bond.
    Gui is currently managing two offshore bond funds of several
hundred million dollars, one of which is pure investment grade
yuan and has been fully invested, and the other is high-yield 
with a mixture of yuan and dollar bonds.
    IG offshore yuan bonds, consisting of mainly Chinese
government, policy bank and state-owned corporation bonds, were
red hot when the yuan appreciated strongly during the past few
years and yuan products were in short supply outside China.
    But now that investors can earn more than 3 percent by
simply saving their yuan in banks here, yields for higher-rated
dim sum bonds have been moving up, though treasury dim sum bonds
remain relatively lackluster compared with other IG bonds.
    IG dim sum bond yields have jumped to a record high on the
HSBC index, and the spread between IG and HY yields has narrowed
to one-year low at around 250 basis points.
    Market players said continued inflows into Asian bonds will
underpin the offshore yuan bond market and the improving risk
appetite is likely to benefit HY sector.
    "The offshore yuan government bonds are not very alluring,
and the key strategy in the short term is still to carefully
select and invest in bonds with lower ratings," said Yang Xi,
fixed income analyst at Citic Securities.
    Gui is also considering raising the yuan bond proportion in
its HY fund as more HY issues enter the market. The fund
includes around 10 yuan bonds out of the total of 60 HY dim sum
bonds now available.
    
    
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    WEEK IN REVIEW:
  * Renminbi usage worldwide grew by 15.6 percent during July
and August, compared to an average decrease of 0.9 percent
across all currencies, according to SWIFT, adding renminbi has
become world's 14th mostly used currency with a market share of
0.53 percent.
  * Rising funding costs of the offshore yuan are forcing banks
to increase their yuan lending rates. Hang Seng Bank and Bank of
East Asia announced to raise its renminbi prime rate from 3
percent to 4 percent per annum from 3 October. 
  * Taiwan hopes to have China's yuan as part of its foreign
exchange reserves within a year, its central bank chief Perng
Fai-nan said on Wednesday, adding he also hopes a currency swap
agreement with China will be in place within the same timeframe.
 
  * Growing trade between China and Malaysia will encourage more
yuan-denominated fundraising through the issuance of
conventional and Islamic bonds, Malaysia's central bank chief
Zeti Akhtar Aziz said on Thursday, adding one of the changes to
shape the international financial system in the years to come is
the wider role of renminbi in trade and finance. 
  * Renminbi insurance products have become less appealing as
more investment channels are available and the currency's
appreciation expectation cools down. In the first half of 2012,
new renminbi insurance premiums declined 52 percent year on year
to 2.13 billion yuan in Hong Kong.
 
    CHART OF THE WEEK:  
    IG & HY dim sum bond yield spread narrows:LEAGUE TABLES    
    
    Book runner:        Proceeds (RMB mln):       # of issues:  
 
    1. HSBC                31,739.4                    101     
    2. Standard            15,540.1                     54     
       Chartered Bank     
    3. Bank of China        9,860.6                     13    
    4. BNP Paribas SA       9,193.1                     32     
    5. Barclays             6,711.7                     14      
  
    
    YTD synthetic RMB bond issuance:       
    Book runner:         Proceeds (RMB mln):       # of issues: 
  
    1. Deutsche Bank       4,479.2                       3    
    2. Citi                2,912.5                       2    
    3. Bank of China       2,312.5                       1    
    4. Bank of America     2,312.5                       1     
       Merrill Lynch    
    5. HSBC                1,248.5                       2     
  
    * Thomson Reuters data as of Sept 27.
       
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