Nomura recommends receiving 5y5y HK IRS, targeting 3.55%

Overview

This is a Nomura Asia rates strategy trade report focused on Hong Kong rates. The report recommends entering a receive position in 5-year forward 5-year HKD interest rate swaps, based on factors including potential U.S. curve flattening, changing levels of Hong Kong-U.S. long-end spreads, weak HKD loan growth, stabilizing fiscal reserves, and changes in the bond supply structure.

Core views

The report’s core view is that Hong Kong long-end rates have room to decline. The authors believe that even if a rebound in oil prices makes the Fed more hawkish, U.S. long-end rates may still fall if concerns over an equity market correction persist, with spillover to Hong Kong rates. Meanwhile, the Hong Kong 10-year versus U.S. 10-year IRS spread has rebounded from its low to above 50bp, HKD loan growth has not shown a meaningful recovery, fiscal reserves have improved year over year, and issuance of non-financial corporate bonds has slowed, all of which support the trade direction of receiving 5y5y HK IRS.

Analysis framework

The analytical framework focuses on macro rate linkages, local Hong Kong credit demand, fiscal conditions, and HKD bond supply. The report first assesses the spillover impact of the U.S. long-end curve on Hong Kong long-end rates, then combines the HKD loan-to-deposit ratio, mortgage loan growth, year-over-year changes in fiscal reserves, and the issuance pace of corporate and quasi-government bonds to form a strategy trade view for a decline in 5y5y HK IRS.

Methodology notes

• Fixed Income StrategyDirectional Interest Rate Swap Trade

  Receive 5y5y HK IRS

  Receiving IRS typically benefits from falling swap rates; this report recommends receiving 5-year forward 5-year Hong Kong IRS near the current 3.83% level, with a target of 3.55%.

• Macro RatesU.S. Rates Curve Transmission

  Transmission of lower U.S. long-end rates to Hong Kong long-end rates

  Hong Kong rates are linked to U.S. dollar rates, and the report believes that if long-end U.S. rates such as 5y5y continue to decline, Hong Kong long-end rates may follow lower.

• Local CreditLoan-to-Deposit Ratio Monitoring

  Sluggish HKD loan growth

  The HKD loan-to-deposit ratio fell from 73.2% six months earlier to 71.0% in May, indicating loan demand remains weak and reducing upward pressure on long-end rates.

Asset mapping & comparison

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

• 5y5y HK IRS

  Core recommended trade instrument

  Strengths

  Benefits from a decline in Hong Kong long-end rates, transmission from U.S. curve flattening, weak HKD loan demand, and slowing non-financial bond supply.

  Weaknesses

  The conviction level is only 3/5, indicating moderate confidence in the trade; the report also acknowledges that Hong Kong’s medium-term fiscal position still warrants caution.

  Comparison

  Compared with directly trading short-end rates, this position more directly expresses the view of declining forward long-end Hong Kong rates.

  Risks

  Higher U.S. long-end rates, oil-driven further increases in inflation expectations, renewed fiscal financing pressure in Hong Kong, or increased HKD bond supply could all hurt this trade.

• Long-end HKD bonds/Hong Kong rate assets

  Related affected assets

  Strengths

  If long-end rates decline, long-duration HKD rate assets may benefit in price.

  Weaknesses

  Supply timing and financing demand for fiscal projects may alter rate pressures.

  Comparison

  Issuance of long-duration HKD bonds by financial companies remains strong, creating a structural contrast with slowing non-financial issuance.

  Risks

  If proceeds from financial bond issuance are swapped, this may depress HKD CCS and indirectly affect the IRS curve, though the specific impact depends on hedging and swap behavior.

Key data

• Recommended tradeReceive 5y5y HK IRSThe report explicitly recommends entering a receive position in 5-year forward 5-year Hong Kong interest rate swaps.
• Current level3.83%The current 5y5y HK IRS level cited in the report.
• Target level3.55%The target is to move to 3.55% by end-August 2026.
• Conviction level3/5The report assigns a conviction level of 3/5 to this trade.
• HKD loan-to-deposit ratio71.0%The May level, versus 73.2% six months earlier.
• Mortgage loan growth3.3% y-o-yOver the same period it rose from 1.0% y-o-y to 3.3% y-o-y, but overall HKD loan growth remains sluggish.
• 10y HK-US IRS spreadabove 50bpThe report says the spread rebounded from as low as -85bp to above 50bp.

Impact & implications

If the report’s view plays out, a decline in 5y5y HK IRS rates will benefit receive-fixed positions. This view also implies that Hong Kong long-end rates may be jointly pressured by a decline in U.S. long-end rates, weak local credit demand, and a slowdown in non-financial bond supply.

Risks

• U.S. long-end rates may not decline as expected and could continue rising due to oil price and inflation concerns.
• Hong Kong still faces medium-term fiscal pressure, and projects such as the Northern Metropolis may require substantial investment over more than five years.
• HKD bond issuance or fiscal financing demand may rise again, potentially pushing up long-end rates.
• The fixed income trade recommendation may be reviewed or stopped out as market conditions change.
• The report discloses that prices and yields are indicative levels at the time of publication and may not be actual executable prices.

What to watch

• Moves in U.S. 5y5y and long-end Treasury yields, and whether the equity market correction persists.
• Whether the 10y HK-US IRS spread continues to narrow or widen.
• Whether the HKD loan-to-deposit ratio and HKD loan growth recover.
• Year-over-year changes in Hong Kong fiscal reserves and financing demand from major public 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-duration HKD bond issuance by financial companies and related swap activity on HKD CCS and the IRS curve.