Recent plunge of HIBORs

1M HIBOR plunged from 4.00% since early May to below 1% within a month. Overnight HIBOR even fell to below 0.1% since 5^th May, the first time since COVID. Meanwhile, the USD rates remain far from the zero-interest-rate regime. This peculiar situation largely results from eroding confidence in the USD and its assets.  This focus piece examines the possible playbook of HIBORs, and its impact on equities, fixed income, properties, and banks.

Along with the appreciation of other Asian currencies, USD/HKD hit the strong side of its trading band of 7.75 earlier this month, triggering HKMA intervention in the market by selling HKD. The Aggregate Balance, an indicator of interbank market liquidity, jumped almost fourfold to HKD 174 billion from HKD 44 billion.

Near-term playbook

We expect this anomaly to fade. In our base case scenario 1, upcoming seasonal demand for HKD stemming from half-year-end settlements and dividend payouts will support short-term HKD rates in June-July. A buoyant stock market will also bolster HIBORs.

Scenario 2: Even if HKD demand proves temporary, HKD rates should stabilize or even rebound under the Linked Exchange Rate System. The 3M HIBOR-SOFR spread has widened to an unprecedented level of ~280 bps. This creates an opportunity for carry trades, pulling the USD/HKD spot back from the strong side of the trading band toward 7.83. 12M forward outright also rebounded from 7.68 to 7.71. The immediate need for the HKMA to inject HKD liquidity is therefore reduced. Both USD/HKD and HIBORs are likely to stabilize soon. If HIBORs plummet further toward 0%, the HKD will weaken further toward the weak side of the band, triggering HKMA intervention to buy HKD.  The upshot is that HKD rates should rebound in the near term in both scenarios. In fact, forward IRS rates also exceed current spot rates, suggesting market expectations of rising HKD rates.

Downward revision of HIBORs forecasts

HKD could be structurally stronger over the medium term given a weaker USD due to 1) Trump’s Mar-a-Lago Accord strategy for a weaker USD, and 2) fiscal (see: FX Quarterly 2Q 25: Cracks in the USD’s status). Our FX strategy team expects DXY to hit 92.5 by the end of 2026, a level close to the 2021 low during the COVID-QE era. USD/HKD is projected to hover around 7.77-7.81 over the next 18 months. 

This structural change will tolerate more ample liquidity, lower HIBORs and wider HKD-USD spreads. In our view, the 3M HIBOR-SOFR differential could widen from ~50bps to ~150bps if the terminal Fed Fund Rate (FFR) is assumed to be 4.00%. Such spread could discourage aggressive arbitrage inflows (FX risk of 7.75-7.85 is roughly 130bps) but reflects HKD's liquidity premium. On the demand side, the weak loan growth will keep rates at bay.

Therefore, 3M HIBOR should settle at 2.30% by the end of 2025 after the initial HKMA intervention at the weak side of the trading band (if any). This compares to our previous forecast of 3.40%. The upcoming 50bps FFR cut also paves the way for lower HIBORs.

Risks to forecasts

HIBOR could skew toward a downward bias if DXY falls to its historical low of around 70-80. Conversely, a DXY recovery based on 1) a full-blown US trade war victory, 2) a stronger-than-expected American economy, and/or 3) relief of fiscal worries without QE.

Impact on government bonds

While demand is set to soar on flush liquidity, the limited supply of HKD bonds will sooth the yields. The outstanding Hong Kong government bonds has fallen 37% since its peak amid the Fed hiking cycle and the end of COVID. Even if the government re-engineer its bond issuance to finance fiscal deficit, public debt as a percentage of GDP is only expected to increase from 9% to 16%.

Impact on equity market

Excess liquidity tends to flow into HKD assets.  Looking back at 2008-09, 2012-15, and 2020-21, the stock market tended to rally amid HKMA intervention and capital inflows. The Hang Seng Index (HSI) saw a 40-80% jump from trough to peak during these periods. Lower funding costs facilitated margin financing. Stockbroker loans, in fact, skyrocketed.

We see three sources of incremental liquidity that could fuel a Hong Kong equity market rally.

First, interbank liquidity is likely to remain flush due to HKMA intervention. A structurally weaker USD could keep HIBORs anchored.

Second, inflows from the Southbound Stock Connect, which have reached HKD 621 billion year-to-date in 2025, could be boosted by China’s monetary easing. Resurgent M2 growth in China will likely help. The correlation between the 12-month lagging YoY growth of the HSI Tech Index and China’s YoY M2 growth has been strong at +0.7x since 2020.  China's investment in AI is another key catalyst that could spur capital from onshore.

Third, frequent IPO activity attracts capital. The number of IPO applications in the pipeline jumped from 120 in March to 148 in April.

A medium- to long-term bull run remains conditional on the economic fundamentals for China and Hong Kong. Lingering trade tensions, China’s property market woes, and consumption downgrading remain as sources of concern.  The relatively steady USD/CNY, which is expected to remain above 7.00 over the next 18 months, suggests relatively modest upward equity market momentum ahead.

Impact on property

Lower HIBOR may not help home prices a lot. Should 1M HIBOR rebound to around 2% after the initial overshoot, the effective mortgage rate (1M HIBOR + ~1.4%, capped at Prime Rate – 1.75%) will exceed the ~3% rental yield again, creating a negative carry situation. Meanwhile, developers are adopting flexible pricing strategies amid ample inventories.  Unsold units remain at a post-SARS high of 22,654 as of Q1 2025. Attractive prices in the primary market have drawn purchasing power away from the secondary market. Meanwhile, rising jobless rate and falling labour force participation rate point to tepid purchasing power. These will drag the home prices by at most 5% before stabilizing in 2026. 

Impact on banks

Relatively lower HIBORs can add impetus for lending activity. Banks enjoy cheaper access to wholesale funding, which can encourage more aggressive loan pricing, especially for floating-rate or short-tenor corporate, mortgage loans, and even retail car loans. Loans for overseas (and Mainland China), which accounts for ~20-30% of the total loans, may also see temporary upside amid the reverse of HIBOR-SHIBOR spread. That said, the still weak economic fundamentals could restrain the credit demand. Empirically, loan demand responses to 4Q lagging HK GDP growth. The narrowing HIBOR-SHIBOR spread will only bring the loan growth back to 1-2% in 2025 and 2026. 

Banks' net interest margins (NIM) will also compress. Lower HIBORs weigh on the yield banks earn on HIBOR-linked floating-rate loans, especially legacy portfolios that are repriced downward. On a positive note, lower HIBORs can indirectly boost banks’ fee income through strengthening capital market activity and wealth management businesses. As borrowing costs fall, corporates may issue more bonds. Equities issuance and IPOs will also gain traction on higher valuation. This diversification helps offset margin pressure and supports overall earnings resilience in a low-rate environment.


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