Hong Kong's offshore yuan bond market may gain in the second quarter after a loss-making start this year as supply pressures ease and the Chinese currency shows signs of stabilization.

The $110 billion so-called dim sum bond market was hard-hit by a weakening currency and record-high issuance volumes during January and March, posting a total loss of 2.1 percent in dollar terms, according to HSBC.

The market's sluggish performance was mainly due to a sharp depreciation in the yuan, which was engineered by the central bank to shake out speculative money that bet on one-way and non-stop appreciation of the yuan.

China's currency has fallen 3 percent against the US dollar so far this year, wiping out more than what it gained in 2013 and offsetting the returns from the rich interest payments dim sum bonds carry compared with other bonds.

Heavy issuance of dim sum bonds in the first quarter also meant issuers had to offer attractive levels to entice buyers, limiting room for yields to ease off. Fresh issuance amounted to 125 billion yuan ($20.04 billion), the highest quarterly level on record, Thomson Reuters data showed. 

However, analysts believe the yuan's weakness is drawing to a close as long-term depreciation only dampens investor appetite for yuan assets and could cause capital flight. That would go against the central government's aim to internationalize its currency.

"We expect a total return of 0.8 percent (in US dollars) for Q2 2014, assuming less increase in average yield and a currency rebound," said Crystal Zhao, an analyst at HSBC.

Reuters