Ordinary investors are increasingly drawn to retail bonds, which can offer attractive returns in the current low interest rate environment. This is an encouraging development.
Recently the Hong Kong dollar bond market has seen a flurry of retail bond issuance activities—pioneered by the Hong Kong Mortgage Corporation (HKMC) in November 2001 and followed by the Airport Authority (AA), the MTR Corporation (MTR Corp), among others. The response from investors has been enthusiastic: demand has exceeded supply by a large margin, with over-subscription rates of up to 13 times. Bonds targeted at retail investors are not new—the HKMC has offered four bonds with retail tranches totalling HK$550 million since 1999, although this amount pales in comparison with the HK$6.6 billion worth of retail bonds issued during the past 6 month. Encouraged by such success, a number of corporate issuers are reportedly preparing to tap the retail market in the near future.
Recent market conditions have been especially conducive to the development of the retail bond market, as the volatile stock and depressed property markets, together with record low nominal bank deposit rates, have stimulated strong retail interests in alternative investment vehicles. Growing acquaintance with bond investment among the public following the implementation of the Mandatory Provident Fund Scheme has also helped stimulate investor demand in bonds.
A number of innovative features originated by the HKMC have facilitated the access of bonds, traditionally reserved for large institutional investors, to retail investors. These include: the low denomination at HK$50,000; the issuance mechanism enabling investors to subscribe through bank branches; and issues with maturity ranging from 1 to 5 years to cater for different planning horizons. It is encouraging to see the increasingly pro-active participation of banks in the retail bond business, which will help banks to diversify their activities and increase their fee incomes. In addition, years of effort in investor education by market participants (industry associations such as the Hong Kong Capital Markets Association and issuers such as the HKMC) and Government regulatory authorities have finally paid off.
We at the Hong Kong Monetary Authority are very pleased with these recent developments. Not only do retail bonds offer issuers an additional channel for raising funds at competitive costs, they also meet investors' demand for low risk investment vehicles with a stable income. They will help enlarge the investor base and improve liquidity in the local debt market, which will in turn strengthen Hong Kong's financial system and its position as an international financial centre. The latest initiatives and efforts of the Government to streamline public offering procedures of debt securities will further support the growth of the retail bond market in Hong Kong.
These developments are welcome. But members of the public should be aware of the various fees and charges, and the risks associated with fixed income product investment. While a bond investor will receive periodic interest payments or coupons similar to interest on time deposits, bond prices can go up as well as down, in response to interest rate movements—the so called market risks. Investors may suffer losses on their principal when they need to sell the bond, unless it is held to maturity. In general, the longer the maturity of the bond, the more sensitive will be its price to interest rate movements. Bonds are also less liquid than savings deposits and investors could be exposed to credit risks depending upon the financial strength of the issuer. The higher returns offered by bonds relative to bank deposits enjoyed by the investors are accompanied by market and liquidity risks, and the possibility that the borrower may fail to honour its repayment obligations.
To promote a better understanding of bond investment, we put on our web-site educational materials in the form of Frequently Asked Questions (FAQs). We encourage anyone planning to invest in bonds to take a look.
Joseph Yam
30 May 2002
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