CNH Tracker-Dim sum bond yields face upward pressure amid heavy supply

By Michelle Chen

HONG KONG, Nov 14 (Reuters) - Yields in the offshore yuan

bond market are facing upward pressure as a jumbo China

government bond sale jostles with other investment grade issuers

to get deals done before the year draws to a close.

With money market rates on the mainland also on an upward

trend - yields on a three-month deposit auction hit a two-year

high of 6 percent - bankers are wary that issuers may have to

offer higher yields to whet investor appetite.

China's Ministry of Finance will return to the so-called dim

sum bond market on Nov. 21 to sell the second batch of yuan

bonds worth 10 billion yuan ($1.64 billion) after it managed to

issue 13 billion yuan dim sum bonds in June.

The offering comprises of a 3 billion yuan two-year tenor

tranche that will be issued to Hong Kong residents, in addition

to the 5 billion yuan three-year and 2 billion yuan five-year

tranches that will be sold to institutional investors.

"The CGB (China government bonds) sector has underperformed

for months and the yield level still has upside pressure towards

the year-end," said a fixed-income analyst at a European bank.

Heavy supplies from investment-grade names in Hong Kong

recently and a possible spill-over effect from rising yields in

the onshore market cast a shadow over the dim sum market, which

eked out gains for four consecutive months since July.

High-quality issuers including China Development Bank (CDB),

Industrial and Commercial Bank of China (ICBC), China Ping An

Insurance and Bank of China Aviation have all completed their

sales of dim sum bonds this month.

While in the onshore market, China's Ministry of Finance

auctioned 28 billion yuan of seven-year bonds in the interbank

market on Wednesday, which saw the average yield hitting a

nine-year high of 4.4515 percent.

"I guess the three-year tranche of the government dim sum

bond will be priced at around 3 percent and the five-year piece

at about 3.1 percent this time," said a DCM (KSE: 024090.KS - news) banker in Hong Kong.

China offered coupons of 2.87 percent and 3.02 percent,

respectively, in June for its three-year and five-year dim sum

bonds, which have been trading under par value most of the time

since then.

That said, appetite for the rare sovereign notes remains,

especially from regional central banks, if China's past issuance

and recent high-rated dim sum sales are any guide.

Central banks snapped up a yuan bond sold by Canada's

British Columbia, taking up 62 percent of the deal earlier this

month. China Development Bank's dim sum issue also saw strong

demand from central banks in Asia and the Middle East.

"Investors who are interested in government bonds do not

necessarily pursue them for high returns. These bonds carry

lower risks, and can be used as collateral to obtain liquidity,"

said Wang Tong, deputy general manager of global markets at Bank

of China Hong Kong.

Market watchers believe improved offshore yuan liquidity due

to the broader use of the currency in international trade as

well as the set-up of more offshore yuan hubs will support the

burgeoning dim sum market.

Total (NYSE: TOT - news) return of dim sum bonds reached a one-year high of

1.37 percent in October thanks to strong yuan appreciation and

capital gains, with the high-yield sector outperforming for the

fourth month in a row, HSBC said in a report.

Yuan deposits in Hong Kong rose to 730 billion yuan in

September, up 2.9 percent from a month earlier, according to

statistics from the Hong Kong Monetary Authority.

WEEK IN REVIEW:

* Chinese asset manager HFT Investment Management (HK)

launched its China High Yield Bond Fund under the Renminbi

Qualified Foreign Institutional Investor (RQFII) scheme on

Tuesday. The fund will invest no less than 60 percent of the

total assets in the onshore bond market, and no more than 40

percent in bonds issued in Hong Kong.

* Hang Seng Bank said it would launch an RQFII ETF

(exchange-traded fund) on Nov. 26, tracking the Hang Seng China

A industry top index. It will be the first local financial

institution in Hong Kong to issue such a product.

* Yuan lending in Hong Kong grew robustly. The outstanding

amount of yuan loans increased to 107.1 billion yuan at the end

of September, up 36 percent from the end of last year, the Hong

Kong Monetary Authority said on Friday.

* Industrial and Commercial Bank of China (ICBC) completed

its sale of a London-targeted dim sum bond. The two-tranche deal

included a 1.3 billion yuan three-year piece at 3.35 percent and

a 700 million yuan five-year piece at 3.75 percent, according to

IFR, a Thomson Reuters (Frankfurt: 864655 - news) publication.

* Taiwan's central bank hopes China will permit Taiwanese

financial institutions to give yuan loans directly to local

firms operating in some Chinese cities such as Shanghai, deputy

governor Yang Ching-long said on Friday.

CHART OF THE WEEK:

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explore options

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Offshore yuan dealt Onshore yuan on CFETS

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