Types of Bonds
There are two types of government bonds in Hong Kong:
- Exchange-Traded Bonds (ETB)
- Issuer-sponsored securities.
ETBs are bought on the market through an exchange, whereas issuer-sponsored securities are bought directly from the company via their brokers.
Buying and Selling Bonds
When you buy or sell a bond, you also need to know its coupon rate. Usually, this is expressed as a percentage per annum. If it’s 5%, then for every HK$1 that you invest into the bond, you’ll get another HK$0.05 paid out to your account at regular intervals before maturity.
Enormous amounts of information about currently traded ETBs are available online.
One exception would be “stock-like” ETBs, which are not as common as more conventional types but can be traded through the Stock Exchange of Hong Kong’s website.
There are no restrictions regarding foreign ownership of any bond listed on either exchange. It enables investors to play around with complex financial instruments like Swaps (of which there are several kinds) by simply visiting banks; however, this article does not cover such advanced topics.
Correctly traded ETBs can be bought and sold through the exchange, so investors don’t need to interact with any brokers at all. Purchases of issuer-sponsored securities, on the other hand, involve banks and their representatives. The commissions for these transactions are usually negotiable, but they will not generally exceed 1% unless there is a lot of market turnover.
Most ETBs trade between 9:15 AM and 11:00 AM every day except Friday afternoons, while issuer-sponsored securities trade all day long from Monday to Thursday.
To add liquidity during off-peak hours, some Exchange-Traded Bonds offer weekly or monthly trading windows in the afternoons.
Hong Kong is a unique administrative region (SAR) of China, and the country’s policies primarily influence its financial system.
For the most part, these systems are also open to foreign investors; however, some bonds may be restricted from purchase by citizens of certain countries like North Korea.
Despite this, Hong Kong remains one of Asia’s most accessible financial markets, and ETBs can be bought and sold without any restrictions whatsoever. This article assumes that all readers have a standard trading account compliant with everything mentioned earlier and a bank account that supports payouts.
First is the issue of diversification, which is a crucial step in allocating funds to new investments. It means that one should only invest in securities they are familiar with and understand their risk profile. It is also important not to exceed 10% of an investor’s overall portfolio worth on any single ETB or issuer-sponsored security as this will increase volatility without additional returns.
Second, it’s important to note the difference between buying and selling prices for these bonds. Most ETBs can be bought at about 1% lower than their face value. At the same time, issuer-sponsored securities tend to trade at par since they are redeemable upon maturity (similarly, stocks always trade at par).
Even though these prices seem relatively low, it’s still important to consider that they are listed on an exchange and traded daily. There is always a market price that could be higher or lower than when you purchased it earlier – not accounting for fees!
How to Sell ETBs?
Investors can place orders through their account representatives or online trading platforms. The trade will only become effective when the counterparty buys above your asking price, so it might take several days before someone takes an interest in your bond.
On the other hand, issuer-sponsored securities are usually held by banks who offer automatic redemptions at face value upon maturity.
They are not listed on an exchange, so investors have no choice but to sell them back directly with the issuing banks. However, these bonds are typically restricted to private investors, so most public market rates will never contact them
Because of the varying interest rates in Hong Kong, ETBs tend to be entirely speculative investments rather than stable sources of income like fixed deposits or government securities.