Hong Kong rates: Maintain max conviction in front-end receive

Nomura's Asia ex-Japan rates strategy team maintains its max conviction (5/5) receive position in front-end Hong Kong IRS, having entered receive Mar-1y HK IRS on 22 September and raised conviction to 4/5 on 13 October and 5/5 on 15 October, with a target of 3.80% by end-November. Three reasons underpin the call: (1) Nomura's US economics team still expects the Fed to pause in October and deliver a final hike in December, then stay on hold through 2027, whereas the market has priced almost two more hikes in 2027 after the December 2026 move, supporting front-end receive generally; (2) the market has overpriced the potential HIBOR rise even if USD/HKD hits 7.85 — HK banking liquidity remains flush with the HKD loan-to-deposit ratio falling to a 10-year low of 69.3% in August, HK banks did not raise prime rates after the September Fed hike, and the recent pullback in spot USD/HKD validates that long USD/HKD is a consensus carry trade with only limited, if any, HKMA intervention;