Tuesday, July 19, 2011

New Inflation-linked iBond (Stock Code: 4208.hk) Bond Analysis

A new investment tool is now available in Hong Kong: Hong Kong Government is going to issue its first retail government bond, an inflation-linked iBond with life span of 3 years (Full name: HKGB 1407 HK$ Retail Bonds due 2014) on July 28 and then list (Stock Code: 4208.hk) it on the Hong Kong Stock Exchange (HKEx stock code: 388.hk) the following day on July 29.

Interest payments of the iBond will be paid semiannually (January 28 and July 28 each year), with the floating annual interest rate based on the local Composite Consumer Price Index (CCPI) Moving Average for the six most recent months, and a minimum guaranteed interest rate set at +1% annually. No interest payment, however, can be further re-invested into the iBond. The H.K. iBond is basically tax-free, and also exempt from stamp duty fee.

This new iBond issue is to help promoting the development of the local-currency (HKD) retail bond market. The maximum issue size will be HKD$10 billion worth of iBonds this time. Your principal investment of the iBond must be HKD$10K (100 units of iBond) or its integral multiples. Initial subscription of the iBond opens only for Hong Kong residents with valid Hong Kong Identity Card so that they can buy at HKD$100 per unit. After the initial subscription, overseas investors can also trade the H.K. iBond in the secondary market once it gets listed (Stock Code: 4208.hk) on the HKEx on July 29. (Source: The Government of Hong Kong Special Administration Region HKSAR iBond Prospectus)

Is the H.K. inflation-linked iBond worth investing? By our calculations, according to the general formula for semiannual interest rate bonds, the estimated market price of the iBond with face value of HKD$100 should be:

MIR = +1%MIR = +2%MIR = +3%
CCPI = +3%HKD$105.90HKD$102.90HKD$100.00
CCPI = +4%HKD$108.84HKD$105.80HKD$102.85
CCPI = +5%HKD$111.79HKD$108.69HKD$105.70
CCPI = +6%HKD$114.74HKD$111.59HKD$108.55

(Table: iBond Market Price under different MIR and CCPI combinations)


MIR = Market Interest Rate.
CCPI = Composite CPI, which is published by the C&SD (Census and Statistics Department) of Hong Kong.

HK Hong Kong CCPI Unemployment Rate GDP data chart

(Table: H.K. GDP, CCPI, and Unemployment Rate in Recent 5 Years)

For example, if Hong Kong CCPI is +4% and MIR is +3%, the estimated market price of the iBond should be HKD$102.85. The market price of the iBond will further increase as inflation (CCPI) rises faster than MIR.

Does the H.K. inflation-linked iBond really contain no risk? As per the iBond issue prospectus, the main risks of the H.K. iBond are:

(1) Market Interest Rate (MIR) risk: The market price of the iBond will decrease if the MIR increases during the term of the iBond. However, if you hold the iBond until maturity date (July 28, 2014), Hong Kong Government will still repay 100% (without any inflation-adjusted) of your iBond principal investment.

(2) Index (CCPI) risk: The market price of the iBond will also be negatively impacted if the H.K. CCPI drops during the term of the iBond, though you may ignore its market price in the secondary market if you decide to hold the iBond until maturity date.

(3) Liquidity risk: The secondary iBond market may not be active and you may not be able to sell your iBond at reasonable price prior to maturity.

(4) Credit risk: The iBond value can be affected by the credit rating of HKSAR. Hong Kong is now rated AAA (long-term rating) by Standard & Poor's (S&P), which is even better rating than that of the U.S. Treasury, and thus debt default risk of HKSAR is slim.

Conclusion of this bond analysis: We recommend a buy for the H.K. inflation-linked iBond during the initial subscription if you are a qualified hongkonger, as buying at HKD$100 per unit is a bit like a kind of social welfare. For foreign investors, you may consider to buy it at HKD$102.85 (subject to change under different MIR and CCPI combinations) in the secondary market.

After all, the risk of investing in the H.K. iBond is relatively low. Although the yield of iBond should normally not be high and your overall purchasing power may not be fully maintained, you can at least hedge partially against inflation and should get some more protections if a serious inflationary spiral occurs.

Remark: What are the differences between the H.K. iBond and the other similar inflation-linked investment products, such as ISB (U.S. Savings Bonds, or called I-Bonds) or TIPS (Treasury Inflation-Protected Securities) in the U.S.?

Basically, the H.K. iBond is similar to ISB in the U.S., except mainly that the ISB cannot be traded in the secondary market or traded by foreign investors, ISB can have a much longer life span (maximum 30 years), ISB is redeemable (with penalty if less than 5 years), ISB's yield can be accrued until redemption, and ISB annual purchase size per Social Security number is limited by the U.S. Government.

The H.K. iBond, on the other hand, is also different from TIPS. Yield on TIPS cannot be tax-free, principal can increases (or decreases) with inflation (or deflation), interest payment calculations are then based on the adjusted principal, and there is no any kind of minimum guaranteed yield for the TIPs. The life span of TIPS is also longer and can be 5, 10, or 30 years. The annually taxed TIPS, in fact, is totally another type of inflation-linked hedging tool with a more volatile yield than that of the H.K. iBond.

More Bond (or Stock) Analysis:
Table of Summary: All Our Bond (or Stock) Analysis Reports


Post a Comment

Popular Articles in this Week (Top 10)

Not What You Want?

Try More Search in Our Website Here...