<p>The author recently revealed exclusively on Facebook that there are reports that a bank's &#34;income advantage bond fund&#34; will be suspended. As expected, this product, described as a &#34;Lehman precursor,&#34; has been suspended from sale by HSBC, citing recent market discussions that may affect investors' decisions. However, it emphasized that the product is still available, and the suspension is a precautionary measure. The bank will evaluate and decide on the next steps. If readers have a good memory, they should recall that this column has previously discussed the rise of private credit, and this fund can be seen as a microcosm of the private credit era in recent years, so it is worth adding a few more words now.</p>
<h2>Suspended Product is Defensive Income Type</h2>
<p>First, let's share the views from the asset management industry. Products that retail investors can access and purchase have never been particularly aggressive. Many people associate private credit with high risk and high returns, but this fund (and similar ones) is essentially more of a &#34;defensive income type&#34; product. In other words, it is not about going all in on private credit to gamble for high yields, but rather participating in the private market in a relatively mild way to enhance the income potential of traditional bond portfolios. For investors who already hold a large amount of fixed deposits or investment-grade bonds, this &#34;spicy&#34; allocation is a rational response to the current reality of scarce opportunities in the public market.</p>
<p>Bringing the private market to retail investors is an inevitable trend. Over the past decade, private credit has moved from niche to mainstream. The appeal of private credit lies in its higher yields and lower correlation with the public market, performing relatively steadily during interest rate hikes (many are floating rate). Large non-bank institutions such as Apollo, Blackstone, and KKR manage private credit assets that have reached hundreds of billions of dollars. They not only serve the acquisition financing of private equity funds but have also begun to extend significantly to the retail side.</p>
<p>The year 2007 was a watershed moment for professional investors, marking the end of the &#34;Great Moderation.&#34; The era of low inflation and stable economic growth that began in the 1980s came to an end, followed by tensions in the credit market, ultimately evolving into a global financial crisis. By 2025, the credit market showed disturbing similarities, with the spread between corporate bonds and U.S. Treasuries falling to the lowest level in 18 years, only about 2.8 basis points apart from high-yield (junk) bonds, far below the 20-year average of 4.5 basis points. Some highly rated corporate bonds (such as those issued by Microsoft) even had yields lower than U.S. government bonds. The market pricing reflects that investors seem to believe that default risk has reached an all-time low.</p>
<h2>Opaque Financial Engineering Difficult to Fully Grasp</h2>
<p>But is reality as optimistic as it seems? By the end of 2024, the outstanding loans in U.S. private credit had reached $16 trillion, nearly matching the public junk bond market. The rapid rise of private credit is essentially a vacuum left by banks withdrawing from high-risk lending after the financial crisis, filled by emerging institutions. These large players are willing to accept higher risks in exchange for higher returns, but this also brings extremely complex and opaque financial engineering arrangements, many of which may not be fully understood even by regulatory agencies or the institutions involved
This is due to several reasons: institutional investor demand is saturated, traditional large players such as pension funds and insurance companies have heavily allocated private credit, seeking new sources of funds. Retail investors' thirst for yield, after a period of low or even negative real interest rates, has made traditional fixed deposits and investment-grade bonds difficult to satisfy for retirees or investors seeking stable cash flow. Additionally, product innovation has lowered barriers, allowing retail investors to finally &#34;directly participate&#34; in private credit through publicly listed Business Development Companies (BDCs), private credit ETFs, tokenization, and hybrid public-private debt funds.</p>
<h2>Investment Opportunities in the Public Market Are Becoming Scarcer</h2>
<p>Opportunities in the public market are indeed becoming scarcer. The bond market in 2025 is facing the issue of extremely narrowed spreads, with investment-grade corporate bond spreads approaching historical lows. The market's overly optimistic expectations for an economic soft landing (or even a zero landing) have led investors to flock to any assets with a slight additional yield, resulting in a few basis points of spread while facing increasingly larger risks. The margin of safety has become extremely thin; should the economy experience a setback (such as further deterioration of low-income consumers or rising auto loan default rates), as described by The Economist, a chain reaction similar to the 2015 energy bond storm could easily occur. In contrast, while the private credit market also carries risks (such as payment methods substituting interest with physical assets, increased debt restructuring operations, and low valuation transparency), it still offers relatively high yields, and many loans are backed by collateral with stricter contractual terms. Investment demand is thus &#34;forcing&#34; allocations from the public market to the private market in pursuit of higher spread compensation.</p>
<p>The direction of the entire industry is similar, as seen with Blackstone's BCRED and various retail products from Apollo. HSBC's &#34;Income Advantage Bond Fund&#34; has emerged under this major trend. According to the fund documents, it can invest up to 20% in Business Development Companies (i.e., publicly listed private credit instruments) and can indirectly invest up to 10% in syndicated loans through total return swaps. These are asset classes that retail investors could hardly access in the past, essentially opening up private credit opportunities that were originally reserved for institutional levels to retail clients, allowing investments in investment-grade and non-investment-grade corporate bonds, securitized credit (such as asset-backed securities and mortgage-backed securities), and listed private credit.</p>
<p>Among these, the most attention-grabbing is undoubtedly private credit, simply put, the relevant portion has an upper limit of up to 20% invested in BDCs (the most easily tradable private credit tools in the public market), and up to 10% participating in syndicated loans indirectly through derivatives. Therefore, the private credit exposure of the entire fund can account for up to around 30%, with the majority still being traditional public market bonds and securitized products. The average duration target is controlled at 2 to 3.5 years, with a credit rating target of investment grade, and it is said to be only risk 3, indicating that the risk is not the highest. This fund can actually only be considered tangentially related, far from being pure private credit</p>
<h2>Mixed Income Fund Configuration is Considered Conservative</h2>
<p>This point is very important to avoid misunderstandings by investors. It is not an aggressive &#34;pure private credit fund,&#34; but rather a mixed income fund that attempts to enhance overall yield by incorporating a small amount of alternative credit while controlling risk. For retail investors generally seeking stable monthly interest, this allocation ratio is actually considered conservative. Of course, risks still exist; private credit has low transparency, valuations may lag, and default rates could surge during economic downturns. Additionally, the fund itself involves non-investment grade bonds, emerging market bonds, securitized products, etc., which will certainly have higher volatility than pure investment-grade bonds. Investors must understand that the target distribution rate of 8% is not guaranteed, and distributions may come from principal, with capital value also subject to fluctuations.</p>
<p>Starting in 2026, the continued penetration of private markets into retail investors has become the biggest theme in fixed income. With public market spreads compressed to extremely low levels, in an environment where investors seek reasonable income, it is almost inevitable to &#34;leverage&#34; private credit. From the perspective of global asset management, HSBC's product design for this fund is also reasonable; issuance and distribution approved by the Securities and Futures Commission and the Monetary Authority is legal, and selling a relatively controllable risk, more liquid mixed package to retail investors is not unreasonable, is it?</p>
<p><strong>Jiu Li Sheng</strong></p>

HSBC

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<p>HSBC Bank has temporarily suspended the sale of the "Income Advantage Bond Fund" due to market discussions that may affect investor decisions. The fund is described as a "Lehman precursor" and is a defensive income product that reflects the trend of retailization of private credit. Private credit offers higher yields and has low correlation with the public market, performing robustly during interest rate hikes. It is a trend for retail investors to access the private market due to the scarcity of opportunities in the public market</p>

- The HSBC "Income Advantage Bond Fund" has paused sales due to market discussions that may influence investor decisions, despite its characterization as a defensive income asset.  
- This fund reflects the trend of private credit's rise in retail markets, where traditional products offer insufficient returns, driving demand for innovative investment structures that include private credit exposure.  
- Investors must remain aware of the inherent risks, including potential volatility and the low transparency associated with private credit, as they seek stable income in a tightening public market environment.

The trend of retailing private lending products is unstoppable | Jiuli Sheng