Four Charts Show Why Dim Sum Bonds Are Back in Vogue After Routby
Onshore-offshore yield gap halved from record high in February
China MOF to sell 14 billion yuan in Dim Sum bonds on June 29
Appetite for Dim Sum bonds is reviving as yuan volatility recedes and investors are drawn by the extra yield offered by securities in Hong Kong compared with Shanghai.
The following charts show how offshore yuan debt rallied in the past five months due to relatively high yields, shrinking supply, falling financing costs and a stabilizing yuan. The recovery comes ahead of the Ministry of Finance’s planned sale of 14 billion yuan ($2.1 billion) of debt in Hong Kong on June 29 and another 14 billion yuan of issuance earmarked for the second half.
Chart 1: The yield premium for three-year offshore corporate debt versus similar onshore paper narrowed to 130 basis points after widening to a record 334 on Feb. 24, according to a Bank of China index. That spread is still attractive and will narrow further, according to Desmond Chan, a fixed-income investment manager at Sinopac Asset Management Ltd. in Hong Kong. “For bonds with similar credit quality, we are getting higher yields in Dim Sum versus onshore,” he said. “The trend will continue until further opening up of the Chinese markets will make yields converge eventually.”
Chart 2: Sales of offshore yuan-denominated bonds this year have slumped to 47 billion yuan, one third of 2015’s full-year total of 157.2 billion yuan, data compiled by Bloomberg show. Issuance recovered to 35.4 billion yuan this quarter from last quarter’s 11.8 billion yuan, the lowest in three years.
Chart 3: Dim Sum notes have become more attractive for dollar-based investors using swaps. The one-year offshore yuan cross-currency swap rate, which investors pay to borrow Chinese currency in exchange for U.S. currency, was 2.71 percent at 11:24 a.m. in Hong Kong, down from a record high of 5.72 percent on Jan. 18.
Chart 4: The offshore yuan’s three-month implied volatility, a gauge of expectations for price swings used to price options, slid the most in Asia in the past three months after Hong Kong’s dollar. It fell to 5.63 percent from an all-time high of 10.5 percent on Feb. 12.