Fidelity bets against China bond rout with record holdings

Singapore

A SAVAGE rout in China's US$2.6 trillion sovereign debt market is offering Fidelity International opportunities to snap up bonds from the world's second-largest economy.

Portfolio manager George Efstathopoulos has boosted investments in Chinese government bonds (CGBs) to a record on expectations of more foreign capital inflows. He also sees them offering protection against risk asset sell-offs and favors their higher yields and lower volatility relative to the likes of US Treasuries.

Mr Efstathopoulos is undeterred by a blistering Chinese stocks rally and surging debt issuance that caused 10-year yields to spike the most since 2016 last week.

"We're still buying," Singapore-based Mr Efstathopoulos said. "China is one of the interesting markets in the sense that we like all of the parts of the China capital structure - we like CGBs, we like credit."

Foreign investors have added to their Chinese sovereign bond holdings every month since early last year as China progressively removed investment limits. As of June, they owned about 9.1 per cent of government debt in the country.

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Despite rising tension between Washington and Beijing, Mr Efstathopoulos expects global inflows to gain momentum as index providers including JPMorgan Chase & Co and Bloomberg Barclays phase in Chinese government debt to their benchmarks.

Most discussion about blocking American investment in China at the moment is focused on equities rather than bonds. This includes a push to block a US government retirement fund from investing in some Chinese companies as well as barring Chinese companies from trading on US stock exchanges.

Fidelity's Global Multi Asset Income Fund, which Mr Efstathopoulos helps manage, had about 3 per cent invested in China's debt markets at the end of May.

Chinese government debt "still has very low foreign ownership", he said.

Worsening relations between the two superpowers may actually play to the appeal of Chinese bonds as haven assets.

"I'd argue that any spike in risk, a deterioration in the US-China trade war, will be a positive for CGBs," he said. "It was a positive thing for CGBs in the previous episode." BLOOMBERG