Hong Kong Plans Third HK$10 Billion Inflation-Linked Bond Sale

Hong Kong’s government plans to sell as much as HK$10 billion ($1.3 billion) of inflation-linked bonds to local residents, its third such issuance of the debt since a debut offering in 2011.

“New rounds of quantitative easing in Europe, the U.S. and Japan may trigger another round of imported inflation,” John Tsang, Hong Kong’s financial secretary said in his budget speech to lawmakers today. He said further details for the three-year notes will be issued later, without being more specific.

Consumer prices may climb 4.5 percent this year, compared with 4.1 percent in 2012, Tsang said. Inflation reached a peaked of 7.9 percent in July last year and has since eased to 3 percent. The linkers due July 2014, sold in 2011, traded at HK$103.2 as of 12:14 p.m. in Hong Kong, down from HK$105.50 on July 31. The notes paid out interest rates of 6.08 percent, 5.07 percent and 3.38 percent over six-month periods, with the last installment on Jan. 28.

The city first introduced inflation-linked bonds to help citizens preserve purchasing power and boost the local debt market. Hong Kong is due to raise the minimum wage to HK$30 per hour from HK$28 on May 1.

The inaugural sale of HK$10 billion got orders for HK$13.2 billion, while the second offering for the same amount saw bids of HK$49.8 billion, according to the Hong Kong Monetary Authority’s website. Interest payments are based on yields of similar-maturity floating-rate bonds or the average inflation rate over the previous six months, whichever is higher, Tsang said. A fixed rate of 1 percent will be paid if consumer prices rise less than 1 percent, he said.

Bond Program

Hong Kong’s inflation-linked bonds due June 2015 traded at HK$105.75, compared with the record HK$107 reached on Aug. 15, according to data compiled by Bloomberg.

Money printing in developed markets in Europe, the U.S. and Japan has led to a flood of dollars into Asian fixed-income securities. Hong Kong will double the government’s bond program to HK$200 billion from HK$100 billion to cater to global investors’ demand for emerging-market debt and to meet the criteria of certain global benchmark bond indexes to attract funds, Tsang said.

Federal Reserve Chairman Ben S. Bernanke defended the central bank’s $85 billion monthly bond buying yesterday, saying purchases are supporting economic expansion with little risk of inflation or asset-price bubbles. Japan’s yen reached a 33-month low against the dollar this week on speculation the government will push for more monetary easing.

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