CNH Tracker-Higher yields unlikely to hit appetite for dim sum bonds

By Michelle Chen

HONG KONG, Feb 13 (Reuters) - Yields on offshore yuan bonds

are likely to keep rising, yet the market should remain

attractive to global investors given the interest rate returns

and the currency's strength relative to other emerging market

ones.

The so-called dim sum bond market had a record hot January,

as more Chinese companies sought cheaper money than they could

find in the mainland.

The nearly $100 billion market last month saw issuance of 39

billion yuan ($6.43 billion), up 52 percent from a year earlier,

according to Thomson Reuters (Frankfurt: TOC.F - news) data.

Along with big supply came increasing yields, which meant

lower bond prices. The average yield is up 12 basis points (bps)

so far this year, according to HSBC's dim sum bond index. By

comparison, the average yield for Asian local currency bonds

tracked by HSBC has risen 4 bps in the same period.

Some individual dim-sum issuers have seen a sizable rise in

yields. Among them is China's Ping An Insurance, the country's

second-largest insurer by market capitalisation, which tapped

the market three times in recent months.

Ping An's latest sale, in January, was priced at 4.15

percent and 4.95 percent for the three-year and five-year

tranches, respectively. That compared with 4 percent and 4.75

percent sold in November.

Market participants expect further increases in yields given

a strong pipeline of anticipated issues. Pushing up yields are

continuing efforts by Chinese companies to dodge the expensive

onshore market at a time that foreign investors - now equipped

with broader yuan investment channels - have more bargining

power to ask for higher yields.

The approval of Renminbi Qualified Foreign Institutional

Investor (RQFII) has quickened recently and two exchange-traded

funds (ETFs) tracking onshore government debt are expected to be

launched soon, providing exposure to the mainland markets.

Chinese asset managers CSOP and E Fund Management have said

they intend to sell ETFs tracking the ChinaBond 5-Year Treasury

Bond Index and Citi Chinese Government Bond 5-10 Years Index,

respectively, kicking off the first of such product launches.

As an indicator of the yield differentials in the two

markets, the spread of China Finance Ministry's two-year bonds

in China and Hong Kong widened to a two-year high at nearly 190

bps at the end of last year. Analysts say that the differential

may have peaked.

Though climbing yield levels will bring capital losses to

investors, the other two factors that contribute to total dim

sum bond returns - FX gains and interest rate accruals - should

more than offset these losses.

"Amid a strong USD and rising global yields, renminbi bonds

are safe-haven assets that offer solid returns and relatively

low volatility," said Becky Liu, an analyst at Standard

Chartered.

Liu forecasts total returns from holding two-year dim sum

government bonds at 2.7 percent in U.S. dollar-terms this year,

assuming yields rise by 50-60 bps, while government bonds with

the same tenor in other major currencies are all expected to

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THOMSON REUTERS SPEED GUIDES