The Hong Kong Monetary Authority (HKMA) will stop issuing new exchange fund notes with tenors of three years and above, and instead issue new government bonds in a move aimed at unifying the two yield curves. HKMA, the territory's de facto central bank, said it would also introduce a repo facility for government bonds under a programme capped at HK$10 billion. It currently provides liquidity to banks through repos using EFBN as collateral.
"The rationale is to reduce overlaps in long-term papers issued under the EFBN (Exchange Fund Bills and Notes) and GB (government bond) programmes and establish a single benchmark yield curve," the HKMA said in an emailed response to Reuters. Starting in January, the HKMA will also stop new issuance of two-year government bonds and new issuance of GBs will be for tenors of three years and above.
"After the streamlining, the EFBN programme will cover issuance in the 90 days to 2 years tenors while the GB programme will focus on issuance in tenors of 3 years and above." Analysts said the EFBN yield curve traded below the GB yield curve because it was backed by the Hong Kong's foreign currency reserves and because it enjoyed greater market liquidity.
They said the move would unify the two curves and avoid confusion among issuers who use the curve to price their debt. The EFN would continue to be a liquidity adjustment tool while the GB curve would be a pricing benchmark for longer-dated HKD debts, they said. The EFBN programme is primarily a liquidity management mechanism and their replacement by government bonds for longer tenors could be in preparation for the territory's government to run up budgetary deficits in future, analysts said.
"In the past the HK government has never had a budget deficit so there was no need for a GB issuance programme," said Becky Liu, Standard Chartered analyst. "But a few years down the road, we could potentially see HK govt start running a budget deficit as the surplus dries up. The financial secretary has warned the market of this possibility." She added that Hong Kong rates would continue to follow the US market closely under its pegged currency system.
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