China bond inflow extends on lucrative swaps, PBOC easing hope
GLOBAL investors raised their holdings of Chinese bonds for a fourth straight month, capitalising on a lucrative currency swap strategy to continue their gradual return to the world’s second-biggest debt market.
They bought 181 billion yuan (S$33.7 billion) of local yuan bonds on a net basis in the country’s main interbank market in December, taking their total holdings to the highest since April 2022, according to Bloomberg calculations based on clearing house data.
Such demand for Chinese debt partly reflected an extended global bond rally on expectations for a Federal Reserve policy reversal but also resulted from a trade that leverages attractive rates for swapping dollars into the yuan. China’s ailing economy and rising calls for further monetary easing also support the outlook of the country’s fixed-income assets.
“Investors are buying bonds and swapping out the forex risk; we don’t really classify these as traits from the usual, standard asset managers buying 10- or 30-year bonds as a big long-term investment,” said Pin Ru Tan, head of Asia-Pacific rates strategy at HSBC Holdings.
A popular trade among offshore investors in recent months has centred around swapping the dollar into yuan at a premium before parking the Chinese currency in short-term debt, often earning a return above Treasury yields.
That said, the potential for the Fed to cut interest rates this year and a more stable yuan would help restore global appetite for Chinese debt. “With US rates off their peak, we expect foreign inflows into China bonds to continue next year,” Ju Wang, head of Greater China FX & rate strategy at BNP Paribas, wrote in a recent note, referring to 2024.
Meantime, some overseas investors could also be paring their underweight position in yuan bonds as bets on fresh policy easing by the People’s Bank of China pick up. Citigroup strategists, for example, said the firm is overweight yuan debt in its emerging-market bond portfolio.
“With macro policy selective and monetary support set to increase, China’s 10-year government bond yields could drift below 2.35 per cent,” they wrote in a note.
The 10-year Chinese bond yield now stands at 2.53 per cent. BLOOMBERG
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