beyondbrics

Are we in a new race to the bottom? Unilever’s renminbi bond issue isn’t just the first from a European company, it also breaks new ground on yields. At just 1.15 per cent, not only does it trump recent dim sum issues by McDonald’s and Caterpillar, it’s also a lower yield than a 10-year Japanese government bond.

But for such a low yield on corporate debt, is it worth buying?

Interest rates play a part. Deposit rates in Hong Kong are miserable. Park renminbi in the bank, and you’ll be lucky to see more than 0.5 per cent interest on it. Rates for Hong Kong dollars are even worse – hitting just 0.01 per cent on longer-term deposits. Unilever’s 1.15 per cent seems punchy in comparison. At 3 per cent, McDonald’s issue looks positively dizzy.

But, as we explained on Monday, dim sum bonds aren’t just about buying yield, they’re about currency exposure. Investors who hold a renminbi bond, according to price action in the renminbi NDF market- essentially a futures contract on the redback – can count on a further 2 per cent appreciation over the next year just on currency terms.

Some put the figure higher – a recent Bloomberg survey put the consensus view on Rmb appreciation at around 4 per cent. The super-charged bulls point to 6 per cent, and possibly even more in the years to come.

With the Rmb currently still seen as a one-way bet – albeit an unexciting one – the way to make decent returns is to load up on leverage. That way be dragons.

While the currency has gained steadily in recent months, that has come during a period of swift monetary tightening, and as the government battled inflation – in part through currency appreciation. It also follows a two-year appreciation hiatus, sparked by the Lehman collapse. Once inflation softens, the interests of exporters will swiftly come back into view.  Some analysts are already suggesting it could depreciate against the dollar in 2012.

For more daring investors – Hong Kong banks offer more than 3 per cent interest on the famously volatile Australian dollar for a 12-month fixed deposit. Since the Chinese central bank loosened the peg on the renminbi last year, it has risen 4.1 per cent against the US dollar. The Aussie has risen more than 18 per cent in the same period.

Going long the renminbi isn’t just lazy, it’s starting to look a bit tired too.

Related reading:
‘Redback’ puts the brakes on, FT
Unilever’s dim sum: cheap credit, beyondbrics
Hong Kong: renminbi central, beyondbrics
ADB Rmb bond: new minnow in the fish tank, beyondbrics
Hong Kong: more dim sum on offer, beyondbrics
Caterpillar ploughs into renminbi, beyondbrics
China wants the world to spend more renminbi, beyondbrics