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CNH Tracker-Higher yields unlikely to hit appetite for dim sum bonds

By Michelle Chen HONG KONG, Feb 13 (Reuters) - Yields on offshore yuan bonds are likely to keep rising, yet the market should remain attractive to global investors given the interest rate returns and the currency's strength relative to other emerging market ones.

The so-called dim sum bond market had a record hot January, as more Chinese companies sought cheaper money than they could find in the mainland.

The nearly $100 billion market last month saw issuance of 39 billion yuan ($6.43 billion), up 52 percent from a year earlier, according to Thomson Reuters data.

Along with big supply came increasing yields, which meant lower bond prices. The average yield is up 12 basis points (bps) so far this year, according to HSBC's dim sum bond index. By comparison, the average yield for Asian local currency bonds tracked by HSBC has risen 4 bps in the same period.

Some individual dim-sum issuers have seen a sizable rise in yields. Among them is China's Ping An Insurance, the country's second-largest insurer by market capitalisation, which tapped the market three times in recent months.

Ping An's latest sale, in January, was priced at 4.15 percent and 4.95 percent for the three-year and five-year tranches, respectively. That compared with 4 percent and 4.75 percent sold in November.

Market participants expect further increases in yields given a strong pipeline of anticipated issues. Pushing up yields are continuing efforts by Chinese companies to dodge the expensive onshore market at a time that foreign investors - now equipped with broader yuan investment channels - have more bargining power to ask for higher yields.

The approval of Renminbi Qualified Foreign Institutional Investor (RQFII) has quickened recently and two exchange-traded funds (ETFs) tracking onshore government debt are expected to be launched soon, providing exposure to the mainland markets.

Chinese asset managers CSOP and E Fund Management have said they intend to sell ETFs tracking the ChinaBond 5-Year Treasury Bond Index and Citi Chinese Government Bond 5-10 Years Index, respectively, kicking off the first of such product launches.

As an indicator of the yield differentials in the two markets, the spread of China Finance Ministry's two-year bonds in China and Hong Kong widened to a two-year high at nearly 190 bps at the end of last year. Analysts say that the differential may have peaked.

Though climbing yield levels will bring capital losses to investors, the other two factors that contribute to total dim sum bond returns - FX gains and interest rate accruals - should more than offset these losses.

"Amid a strong USD and rising global yields, renminbi bonds are safe-haven assets that offer solid returns and relatively low volatility," said Becky Liu, an analyst at Standard Chartered.

Liu forecasts total returns from holding two-year dim sum government bonds at 2.7 percent in U.S. dollar-terms this year, assuming yields rise by 50-60 bps, while government bonds with the same tenor in other major currencies are all expected to suffer losses, including in the U.S., Japan, UK, Germany, France, and Australia.RECENT STORIES: CNH Tracker-Record surge in yuan trade may mask a darker truth More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS THOMSON REUTERS SPEED GUIDES <0#CNHBOND