Scramble tipped after iBond boosted

Top News | Jane Cheung 5 Oct 2020

The next batch of iBonds will guarantee a minimum yearly return of 2 percent - twice the previous threshold.

Authorities will announce details of the issue of the HK$1 billion inflation-linked retail bond today.

Financial Secretary Paul Chan Mo-po, who revealed the iBond's reintroduction in February's budget, said on his blog that the minimum return has been enhanced to make the product more attractive amid "a super low-interest environment."

He noted that large-scale monetary easing policies have been launched in other markets, which pose a risk of inflation.

But, he added, the design of the iBond is beneficial to both situations.

The iBond distributes dividends every six months and the principal will be returned to investors on its maturity date.

"Coming after the iBond will be a silver bond targeting senior citizens of 65 or above," Chan added. "The two batches of bonds will amount to HK$13 billion."

Chan said he wanted to bring back the iBond so more people can join in Hong Kong's financial industry, which contributes 20 percent of gross domestic product.

When it was first introduced in 2011, over 150,000 people subscribed to the iBond, and the number rose to more than 500,000 in the last batch issued in 2016.

Some HK$60 billion of iBonds has been issued in six batches.

"Before the iBond came out the government sold retail bonds," Chan noted. "But only 35,000 people subscribed to them for HK$7.5 billion."

This shows how the iBond was "welcomed by many," Chan said. "Not only does it benefit the development of the retail bond market but it also provides a break-even investment option with a stable return."

Under the influence of Covid-19 infections, Hong Kong has seen deflation for two consecutive months, with the CPI dropping 2.3 percent in July compared with the same month last year - the first deflation in three-and-a-half years.

Deflation of 0.4 percent was recorded in August.

But even if deflation continues on a bigger scale, iBond holders still receive dividends every six months.

All Hong Kong ID holders above 18 can subscribe to iBonds. An applicant must subscribe for at least one trade lot - equivalent to HK$10,000.

All six batches of previously issued three-year iBonds came with a guaranteed minimum return of 1 percent annually, with the highest dividend 6.08 percent on the first dividend date of the first batch distributed in 2011.

The lowest interest was 1.02 percent on the second dividend date of the last batch distributed in 2016, meaning the lowest guaranteed return at 1 percent was never triggered.

Commentators expect the new batch to be well received as it is difficult to find a low-risk product with such returns.

The head of research for Bright Smart Securities and Commodities, Stanley Chik Yiu-fai, said the iBond is a risk-free investment tool that is attractive to general investors looking for a stable return in a fluctuating market.

"Unless inflation goes up a lot in the near future, the stock price will not change too much," he added.

Terence Chong Tai-leung, associate professor of economics at Chinese University, said: "You may not earn interest even if you put money in your savings bank account.

"It's definitely a plus if you can guarantee a 2 percent return amid deflation."

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November 2020

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