Tuesday, April 24, 2012

Hong Kong to issue more iBonds

While the Hong Kong government's plan to launch a second issue of iBonds in June is not exactly news, the upcoming issue has generated some recent debate in the media with views ranging from "it's the best free lunch on offer" to "they are a cynical political tool and a lousy investment".

While the iBonds are touted as bonds designed to protect investors from inflation, this is grossly misleading - they will do nothing of the sort. In the first place, there is no adjustment to the principal - you subscribe at face value and redeem at face value. Second, the coupon is linked to HK CPI - there is no premium over CPI to offer a "real" yield and, in fact, the yield is guaranteed to be less than CPI becuse (i) it is a trailing yield and (ii) bank charges on each coupon payment will have to be paid. Even this assumes that you believe that CPI is a realistic proxy for household inflation (not even close in my household). The floor of 1% is noted but I would be surprised if inflation dropped below 1%.

So why buy an investment that offers a guaranteed negative real return?

The investment rational is that I will be keeping a reasonable amount of money in the form of cash or near cash as I enter retirement (at least two year's worth of expenses). This asset allocation is all about reducing risk rather than maximising returns. While the returns on the iBonds are poor, they are better than anything else I can get in the short term debt or deposit market without taking on FX risk or material credit risk. This makes them more or less a no brainer.

Of course, like last time allocations are expected to be limited so it will be very much a case of taking what I can get (and, no, I wont pay a premium in the secondary market).

All this assumes that the terms of the new issue are the same as the first issue - which is yet to be announced.


Anonymous said...

Have you considered either of the ABF bond ETFs (2819, 2821) as a substitute for some of your cash?

traineeinvestor said...


Thanks for the comment.

I did look at these some time ago and was put off by the low yield and concerns about the impact of rising interest rates (unlike a directly held short term bond I don't get the option of holding 2-3 years until maturity). As things stand, that was a bad call on my part.

I suppose the question is whether it is worth revisiting the decision. All other things being equal, I'd rather hold the bonds directly but there aren't that many choices available.