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The Hong Kong Government has announced its FY26/27 Budget. The immediate impact on rates is likely to remain neutral, but we expect medium-term curve steepening. The negative spread versus UST should narrow at the long-end over time.
First, fiscal stimulus is set to ramp up, supporting a stronger growth outlook. On the consumption front, the tax reduction ceiling has been raised to HKD3,000 in FY26/27 from HKD1,500 in FY24/25, marking the first increase since FY18/19. Basic, child, and elderly care allowances have also been lifted by 10%, 8%, and 10%, respectively. Together with other relief measures, total tax-related stimulus amounts to HKD21bn, equivalent to around 5.5% of retail sales.
Second, the government plans to raise HKD160–220bn of debt annually over the next five fiscal years. About half of the proceeds will be used to refinance short-term liabilities. The authorities also intend to increase long-end issuance (>7 years) to reduce rollover pressure, as it currently accounts for only 12% of total outstanding government bonds. Incremental borrowing will fund subsidies and infrastructure capex aimed at advancing technology development, including AI, quantum computing, new materials, and reindustrialisation initiatives, particularly within the Northern Metropolis project.
There is room for the government to offer relatively higher coupons to attract investor demand. The 10Y HKD–USD sovereign spread currently stands at around -130bps. We expect the pace of compression to be measured rather than abrupt. Overall fiscal metrics have improved. The consolidated account is projected to register a HKD2.9bn surplus, compared with the original estimate of a HKD67bn deficit. The fiscal deficit narrows further to 2.3% of GDP. The balance even returns to surplus after including the debt, the first time since 2023. Revenue improves on stamp duty stems from both buoyant equity and property market. Land premium bottoms out as developers should resume land acquisition. Government debt-to-GDP is expected to rise from 14.4% to 19.9% over the medium term, but remains well below international peers.
In contrast, short-end rates should remain anchored relative to the long end. We continue to see capital inflows from both portfolio investment and direct investment channels, which should keep liquidity ample. The Financial Secretary has pledged to further deepen Hong Kong’s offshore RMB market by lowering transaction costs, strengthening bond issuance and fostering yield curve development. The authorities are also expediting the launch of Chinese Government Bond futures in Hong Kong, alongside the inclusion of REITs and an RMB trading counter under mutual market access schemes.
For direct investment, the government will relax the Corporate Treasury Centres’ (CTCs) eligibility criteria for stamp duty relief on intra-group asset transfers. Additional tax incentives for CTCs are expected to be announced later this year, further reinforcing Hong Kong’s position as a regional treasury hub. As of 2025, total no. of foreign companies (including Mainland China) hit historical high of 11,070. This helps with the increase in total and HKD deposits, which grow by 11.8% and 3.8% in 2025 respectively. These institutional liquidity will search for HKD assets including Hong Kong Government Bonds.
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