Reuters: US Dollar Report: CNH Tracker - Dim sum bond appetite likely to return

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CNH Tracker - Dim sum bond appetite likely to return Sep 27th 2012, 08:14 Thu Sep 27, 2012 4:14am EDT By Michelle Chen HONG KONG, Sept 27 (Reuters) - Fund outflows from investment grade (IG) dim sum bonds on tight offshore yuan liquidity have pushed up IG dim sum bond yields to almost match onshore rates, a level that fund managers and analysts think is an attractive buy. They also like some of the high yield (HY) bonds with better fundamentals or bonds from counter-cyclical industries for richer yields, given this category has been ramped up by the quantitative easing policies of some global central banks. Raymond Gui, senior portfolio manager at Asian fixed-income manager Income Partners, said the convergence of onshore and offshore rates has removed the major hurdle for IG yuan bonds' upside performance, with inviting entry rates for the asset sub-class. "The aggregate 3.5-4 percent yield investors can earn from a diversified portfolio of investment grade dim sum bonds with an average duration of two years or less is attractive in this low-yield world," he said, noting the average yield for a dollar equivalent could be below 2 percent. This suggests that in the search for higher yields, investors would have to take more USD duration risk. Duration risk is of greater concern as US Treasury yield is already very low and is likely to rise in the medium term, cutting the capital value of the bond. Gui is currently managing two offshore bond funds of several hundred million dollars, one of which is pure investment grade yuan and has been fully invested, and the other is high-yield with a mixture of yuan and dollar bonds. IG offshore yuan bonds, consisting of mainly Chinese government, policy bank and state-owned corporation bonds, were red hot when the yuan appreciated strongly during the past few years and yuan products were in short supply outside China. But now that investors can earn more than 3 percent by simply saving their yuan in banks here, yields for higher-rated dim sum bonds have been moving up, though treasury dim sum bonds remain relatively lackluster compared with other IG bonds. IG dim sum bond yields have jumped to a record high on the HSBC index, and the spread between IG and HY yields has narrowed to one-year low at around 250 basis points. Market players said continued inflows into Asian bonds will underpin the offshore yuan bond market and the improving risk appetite is likely to benefit HY sector. "The offshore yuan government bonds are not very alluring, and the key strategy in the short term is still to carefully select and invest in bonds with lower ratings," said Yang Xi, fixed income analyst at Citic Securities. Gui is also considering raising the yuan bond proportion in its HY fund as more HY issues enter the market. The fund includes around 10 yuan bonds out of the total of 60 HY dim sum bonds now available. <------------------------------------------------------ Click here for a Thomson Reuters white paper on "London's infrastructure needs as RMB offshore center":-------------------------------------------------------- WEEK IN REVIEW: * Renminbi usage worldwide grew by 15.6 percent during July and August, compared to an average decrease of 0.9 percent across all currencies, according to SWIFT, adding renminbi has become world's 14th mostly used currency with a market share of 0.53 percent. * Rising funding costs of the offshore yuan are forcing banks to increase their yuan lending rates. Hang Seng Bank and Bank of East Asia announced to raise its renminbi prime rate from 3 percent to 4 percent per annum from 3 October. * Taiwan hopes to have China's yuan as part of its foreign exchange reserves within a year, its central bank chief Perng Fai-nan said on Wednesday, adding he also hopes a currency swap agreement with China will be in place within the same timeframe. * Growing trade between China and Malaysia will encourage more yuan-denominated fundraising through the issuance of conventional and Islamic bonds, Malaysia's central bank chief Zeti Akhtar Aziz said on Thursday, adding one of the changes to shape the international financial system in the years to come is the wider role of renminbi in trade and finance. * Renminbi insurance products have become less appealing as more investment channels are available and the currency's appreciation expectation cools down. In the first half of 2012, new renminbi insurance premiums declined 52 percent year on year to 2.13 billion yuan in Hong Kong. CHART OF THE WEEK: IG & HY dim sum bond yield spread narrows:LEAGUE TABLES Book runner: Proceeds (RMB mln): # of issues: 1. HSBC 31,739.4 101 2. Standard 15,540.1 54 Chartered Bank 3. Bank of China 9,860.6 13 4. BNP Paribas SA 9,193.1 32 5. Barclays 6,711.7 14 YTD synthetic RMB bond issuance: Book runner: Proceeds (RMB mln): # of issues: 1. Deutsche Bank 4,479.2 3 2. Citi 2,912.5 2 3. Bank of China 2,312.5 1 4. Bank of America 2,312.5 1 Merrill Lynch 5. HSBC 1,248.5 2 * Thomson Reuters data as of Sept 27. RECENT STORIES: CNH Tracker-Booming dim sum loans add to profitability of yuan business More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS Offshore yuan bonds THOMSON REUTERS SPEED GUIDES Link this Share this Digg this Email Reprints

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