Overseas Issuers Flock to the Hong Kong Dollar (HKD) Bond Market
The issuance volume and number of HKD bonds by overseas issuers reached HKD 268.2[1] billion and 783 issues in 2025, surging 96% and 54.4% year-on-year, respectively, both hitting record highs. The strong issuance momentum has continued into 2026.
Issuers are dominated by a wide range of financial institutions, including multilateral development banks such as the Asian Infrastructure Investment Bank (AIIB), Asian Development Bank (ADB), and International Bank for Reconstruction and Development (IBRD), as well as policy banks, commercial banks, and multinational corporations from various countries. The issuer base is characterised by high credit quality and extensive geographic coverage.
The investor base is also highly diversified. In addition to core long-term institutional investors in Hong Kong, such as local banks, insurance companies, and Mandatory Provident Fund (MPF) schemes, cross-border investors, including mainland Chinese institutions, sovereign wealth funds from various countries, and global asset managers, have actively participated in subscriptions.
In terms of issuer domicile, supranational institutions accounted for the largest share of issuance in 2025 at 29%. Other major issuer countries include Australia, Germany, and the United States.
The Carry Trade Opportunity: A Core Driver Behind the Recent Surge in HKD Bond Issuance
Hong Kong operates under a currency board system, where the Hong Kong dollar policy rate has long tracked the US Federal Reserve’s policy rate, and market interest rates for the HKD and USD have typically maintained a narrow spread. However, starting in April 2025, affected by reciprocal tariffs, US assets saw a simultaneous slump in stocks, bonds and the dollar. Hong Kong financial institutions, on the one hand, suffered losses on their US stock and Treasury holdings, and on the other, faced significant foreign exchange mismatches in the banking system; heightened external uncertainty led these institutions to reduce their USD asset holdings and cover HKD positions. Coupled with increased activity in Hong Kong’s equity capital market and a peak in IPOs and fundraising, multiple factors jointly drove the strengthening of the Hong Kong dollar.
In May 2025, the HKD/USD exchange rate hit the strong-side convertibility guarantee level of 7.75, prompting the Hong Kong Monetary Authority (HKMA) to purchase USD and sell HKD in accordance with the established Linked Exchange Rate System. Meanwhile, sustained large-scale inflows of Southbound Trading funds led to an extreme abundance of HKD liquidity, and against a backdrop of sluggish HKD demand, HIBOR entered a rapid downward trajectory. The 12-month HIBOR fell from around 4% at the end of April to approximately 2.9%, widening the spread with the 12-month US Secured Overnight Financing Rate (SOFR) to about 1 percentage point, and creating a notable advantage for HKD financing costs over USD. Under the Linked Exchange Rate System, this interest rate spread environment has opened a carry-trade window for borrowing Hong Kong dollars.
From early May to the end of Q3 2025, HKD bond issuance by overseas issuers rose sharply, with Q3 issuance hitting a year-high of HKD 93.69 billion. Issuers generally boasted strong credit quality, with over 65% of overseas issuers rated ‘A-’ or above by the three major international rating agencies in 2025, enabling them to access low-cost funding (Figure 5).
In Q3, the weighted average issue yield of HKD bonds issued by overseas issuers fell to 2.81%, with a median tenor of around 2 years. In contrast, the average yield on 2-year US Treasuries over the same period stood at 3.72%, representing a spread of 91 basis points. This implies that issuers could achieve low-risk arbitrage by converting borrowed HKD into USD to invest in 2-year US Treasuries, while hedging exchange rate risk via FX swaps.
Alternatively, to save on swap costs, issuers may choose not to hedge. Under Hong Kong’s Linked Exchange Rate System, the HKD/USD exchange rate is confined to a narrow range of 7.75–7.85. As long as the carry trade spread remains attractive, issuers can still pursue arbitrage. We view this as the core driver of the surge in HKD bond issuance.
Beyond carry trade demand, the relatively low funding cost of HKD versus USD has also prompted some issuers with original USD funding needs to switch to HKD financing, effectively lowering their overall borrowing costs.
Meanwhile, robust demand has emerged in Hong Kong’s domestic market against a backdrop of an asset shortage. Hong Kong’s banking sector saw a sustained decline in the loan-to-deposit ratio in 2025, and long-term fund managers such as insurance firms and the MPF have been in urgent need of high-quality assets with high credit ratings and stable yields. HKD bonds issued by overseas institutions with strong credit profiles have thus become a core allocation target for local investors.
Short-term Cyclical Surge to Lay the Foundation for Long-term Market Expansion of HKD Bonds
From late 2025 to January 2026, the interest rate differential between the HKD and USD widened again, reopening the carry trade opportunity. HKD bond issuance by overseas issuers reached HKD 48.5 billion in January, nearly four times the year-earlier level, with issuance momentum remaining strong. The main drivers are: sticky inflation in the U.S., keeping USD interest rates elevated, while persistent cross-border capital inflows have maintained ample HKD liquidity and kept HKD market interest rates relatively low. Meanwhile, the spot leg of swaps generated by a surge in carry trades -- the practice of borrowing Hong Kong dollars and converting them into US dollars on a spot basis –- will continue to boost the supply of Hong Kong dollars within the banking system, further depressing HKD interest rates and creating a self-reinforcing cycle of lower rates → stronger demand for carry trades → even lower rates, until the weak-side convertibility guarantee for the Hong Kong dollar is triggered.
Accordingly, we expect that in the short term, the HKD’s phased low-interest rate advantage relative to the USD will persist, arbitrage opportunities will remain intact, and HKD bond issuance is likely to continue expanding substantially. Should the interest rate spread narrow gradually in the subsequent period, HKD bond issuance may moderate.
The long-term market trend will depend on the relative volatility of HKD and USD interest rates, driven by the Linked Exchange Rate System and carry trades. Strong cyclicality will persist over the long run. However, following the recent sharp market rally, active participation by numerous high-rated issuers has created a demonstration effect, making the HKD bond market an important choice for issuers seeking to diversify their funding channels. Coupled with the continuous optimisation of Hong Kong’s bond market connectivity schemes and financial infrastructure, the HKD bond market is poised for steady long-term expansion, with both the issuer and investor bases moving toward diversification and the market ecosystem further improved.
[1] Notes: Excluding issuers from mainland China and Hong Kong, and excluding Certificate of Deposit; Source: Bloomberg
This report is translated from the Chinese version. In case of any discrepancies, the Chinese version shall prevail.
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