Nomura recommends receiving 5y5y HKD IRS, targeting 3.55%

Overview

This is a Nomura Asian rates strategy report focused on the Hong Kong long-end interest rate swap market. The report recommends establishing a receive 5y5y HKD IRS position, targeting a decline in the rate from the current 3.83% to 3.55%, with a conviction level of 3/5.

Core views

The report's core view is that Hong Kong long-end rates have room to decline. Supporting factors include: first, if concerns over an equity market correction persist, US long-end rates may still decline even against a backdrop of a more hawkish Federal Reserve driven by higher oil prices, transmitting to Hong Kong rates; second, Hong Kong HKD loan growth has not improved materially alongside the rebound in property prices, and the HKD loan-to-deposit ratio continues to decline; third, Hong Kong fiscal reserves have recently stabilized, while bond issuance by non-financial corporates and quasi-government entities has slowed, easing supply-side pressure. Long-term HKD bond issuance by financial companies, if handled through swaps, may indirectly depress the IRS curve.

Analysis framework

The report applies a macro rates strategy framework, combining US long-end rate trends, Hong Kong-US IRS spreads, Hong Kong loan growth, the loan-to-deposit ratio, changes in fiscal reserves, and the structure of HKD bond issuance to assess the directional opportunity in long-end HKD IRS.

Methodology notes

• Fixed Income StrategyDirectional Interest Rate Swap Trading

  Receiving 5y5y HKD IRS

  Receiving an IRS generally means that investors benefit from a decline in fixed rates; this report recommends receiving the 5-year-forward 5-year HKD IRS, targeting a decline in the rate to 3.55%.

• Macro Rates AnalysisCross-Market Rate Transmission

  Transmission of US long-end rates to Hong Kong long-end rates

  Hong Kong rates are influenced by the US dollar rate environment. The report believes that if US long-end rates decline due to weaker risk appetite, Hong Kong long-end rates may also follow lower.

• Funding Market AnalysisMonitoring the Loan-to-Deposit Ratio and Loan Growth

  Weak HKD loan demand

  The HKD loan-to-deposit ratio declined from 73.2% six months earlier to 71.0% in May, indicating that loan growth remains sluggish and supporting the case for receiving long-end HKD rates.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 5y5y HKD IRS

  Core Trade Instrument

  Strengths

  Benefits from lower long-end HKD rates; the current level of 3.83% and target of 3.55% provide a clearly defined target.

  Weaknesses

  The conviction level is only 3/5, indicating moderate confidence in the trade.

  Comparison

  Compared with trading short-end rates directly, this position more specifically expresses a view on declining long-end and forward rates.

  Risks

  Rising US long-end rates, a rebound in Hong Kong loan growth, increased bond supply, or deteriorating fiscal conditions could all push HKD IRS rates higher.

• Hong Kong Long-End Rates

  Primary Macro Risk Factor

  Strengths

  Sluggish loan growth and stabilizing fiscal reserves support the view of lower rates.

  Weaknesses

  Medium-term fiscal projects such as the Northern Metropolis may require substantial investment and could still create medium-term pressure.

  Comparison

  Hong Kong long-end rates are linked to US long-end rates, and changes in the Hong Kong-US IRS spread are an important indicator to monitor.

  Risks

  If Hong Kong macroeconomic and property conditions improve further and drive credit expansion, the room for long-end rates to decline may be limited.

Key data

• Trade Instrument5y5y HK IRSThe report recommends receiving the 5-year-forward 5-year HKD interest rate swap.
• Current Level3.83%Reference entry level for the trade provided in the report.
• Target Level3.55%Target to be reached by the end of August 2026.
• Conviction Level3/5The conviction level explicitly provided in the report.
• HKD Loan-to-Deposit Ratio71.0%May level, compared with 73.2% six months earlier.
• Mortgage Loan Growth3.3% y-o-yIncreased from 1.0% y-o-y to 3.3% y-o-y over the same period, but did not drive a material rebound in overall HKD loans.
• 10-Year Hong Kong-US IRS SpreadAbove 50bpThe report states that the spread has recovered from a low of approximately -85bp to above 50bp.

Impact & implications

If the report's view is realized, a receive 5y5y HKD IRS position would benefit from lower long-end HKD swap rates. For investors, the strategy primarily expresses a combined view of declining Hong Kong long-end rates, weak HKD funding demand, and easing supply pressures. However, the trade could come under pressure if US long-end rates rise again, Hong Kong loan demand recovers, or fiscal and bond supply pressures intensify.

Risks

• Rising US oil prices or stronger inflationary pressures could push US long-end rates higher and weaken the HKD IRS downside trade.
• If Hong Kong equity or property markets stabilize and revive loan demand, the downward trend in the HKD loan-to-deposit ratio could reverse.
• Hong Kong continues to face medium-term fiscal spending pressure, and projects such as the Northern Metropolis may require substantial investment.
• A renewed increase in bond issuance by non-financial corporates or quasi-government entities could add supply pressure to long-end HKD rates.
• The prices and yields in the report are reference levels at the time of publication and may not be equivalent to actually executable levels.

What to watch

• Whether 5y5y HKD IRS moves toward the 3.55% target.
• Trends in US 5y5y and long-end rates, and whether the US yield curve continues to flatten.
• Changes in the 10-year Hong Kong-US IRS spread.
• Hong Kong HKD loan growth, mortgage loan growth, and the HKD loan-to-deposit ratio.
• Year-on-year changes in Hong Kong fiscal reserves and financing demand for major infrastructure projects.
• The pace of HKD bond issuance by major corporates and quasi-government entities such as MTR, HK Airport Authority, and Sun Hung Kai Properties.
• The impact of long-term HKD bond issuance by financial companies and related swap activity on the HKD CCS and IRS curves.