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The government announced on Tuesday it will launch the inflation-linked retail bond — or iBond — later this month. The iBond will be linked to the local inflation rate of the preceding six months.
The government will sell up to HK$10 billion worth of iBonds, which will initially be made available to Hong Kong citizens only. Subscriptions will open on July 11 and end July 19, with the minimum subscription amount set at HK$10,000. The iBonds will be issued on July 28 and secondary trading will begin on July 29 whereupon they will be open to all investors.
The so-called iBonds will have a tenor of three years, and bond holders will be paid interest once every six months at a rate linked to Hong Kong's inflation, subject to a minimum of 1 percent, said Secretary for Financial Services and the Treasury K.C. Chan.
"We also want to enhance retail investors' knowledge of the debt market as an alternative form of investment," Chan said at a news conference.
HSBC and Bank of China (Hong Kong) are co-arrangers for the bond issue.
Hong Kong's consumer price index rose 5.2 percent in May from a year earlier, quickening from an annual 4.6 percent in April, with higher food prices and residential property rents the main driving forces.
If the floating interest rate is greater than or equal to the fixed rate, the bond coupon interest will be set based on the floating rate. However, if the floating rate is less than the fixed rate, the coupon interest of the iBond will still be set at 1 percent, thus providing the minimum 1 percent return to bondholders.
"As there will be no cap on the floating rate, this means the iBond coupon interest will rise in line with the inflation rate," Chan said. "Coupled with the good credit rating of the Hong Kong government that can ensure investment safety, I think there will be a healthy appetite from local investors toward iBond subscription."
But if the inflation rate really hovers around 5.5 percent in 2011, as predicted by the government, this means that the iBond coupon interest will be set around this level for the bondholders.
"The coupon interest of 5.5 percent from holding the iBond will be attractive to local residents as the return from holding US Treasuries is less than 5 percent," said Alroy Financial Services Research Manager Patrick Lam. "However, the iBond return cannot hedge against inflation effectively as the return cannot outperform the inflation rate. In this sense, equity investing is still the preferred way to hedge against inflation."