Fears of long-term yuan weakness dampens investors’ appetite for China sovereign bonds
Demand was muted among institutional investors for 10 billion yuan of offshore government bonds despite highest yield to date
The sharp depreciation of the yuan dampened investors’ appetite for Chinese sovereign debt when a batch of yuan-denominated government bonds was issued yesterday in the offshore market.
China’s Ministry of Finance auctioned 10 billion yuan of sovereign bonds to institutional investors on Thursday in Hong Kong and received total bids of 23 billion yuan. This makes the bid-to-cover ratio 2.3 times, significantly lower than the 3.2 times at an auction in June, when near 44.5 billion yuan of bids came in for 14 billion yuan in bonds, according to data from Standard Chartered Bank (Hong Kong).
The muted enthusiasm came despite the fact the bonds carried the highest yield in the primary market since the start of the offshore yuan bond market.
The results suggest investors are concerned about an extended period of offshore yuan liquidity stress
The Ministry of Finance sold a further 2 billion yuan of debt to central banks and monetary authorities on Thursday, but details of the allocation have not been released yet. Another 2 billion yuan tranche was available to retail investors from Friday morning.
Winnie Cheung, assistant general manager of personal banking and wealth management at Bank of China (Hong Kong), feels more optimistic about the sale to retail investors.
“The coupon rate of 3.5 per cent is quite high, and it’s expected to meet retail investors’ demand for high-yield currency investment,” said Cheung.
Notably, the highest demand from institutional investors was for the bonds with the shortest tenor. The 5 billion yuan in three-year notes priced on par with the secondary level of 3.4 per cent before the auction, while there was weaker demand for longer-dated bonds. The five-year to thirty-year tenors priced at a 10 to 40 basis point yield premium over secondary levels.
