Hong Kong Mortgage Corporation issued this week the first zero coupon bond in the Special Autonomous Region.

It is a 10 year HK$ bond with an implied rate of 4.40%.

One particularity of the issue is that it was very much aimed at the retail investors who could subscribe directly via their bank. The issue was well received by the public despite a few comments in the press, which were more linked to the timing of such a set of issues (HKMC issued a total of 3 bonds, one in USD and the 2 others in HK$).

Indeed, now that banks rely less and less on HKMC to buy part of their mortgage portfolio, the argument was more about HKMC’s role going forward –and hence the necessity to raise more funds- than about the issues themselves.

But there was also a comment which made sense to me: by offering a new instrument to the public, with no direct point of comparison (a 10 year zero-coupon rate is obviously different in essence from the gross redemption yield of a 10 year coupon paying bond) might be willing to pay more for the bond then what market makers, and financial institutions at large, would.

Nevertheless, issuing a Zero-coupon bond, and providing it is the first of many to come, could help the fixed income market by providing some direct reference on the interest rate curve rather than having to calculate implied rates from a still relatively illiquid coupon bearing bond market.

In addition, it will also help financial institutions to offer capital guaranteed financial products to the public at large by using a simple hedge instrument. Such products have been very popular in H.K. in the past few years or so, credit to the large local players, but also to Societe Generale, for instance, who is marketing its products via HSBC.

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