CHINA’S sovereign bonds have once again dodged a rout in the global debt market, showcasing one of their frequently cited attractions for investors – a low correlation with their worldwide peers.
The nation’s benchmark 10-year yield has dropped about 23 basis points (bps) this year, while similar-maturity US Treasury yields have jumped 78 bps.
Differing economic cycle
China’s outperformance is driven by a differing economic cycle: The country’s central bank is looking to ease policy to support growth, while policymakers in much of the world keep interest rates elevated to suppress inflation.
Edmund Goh, investment director of Asia fixed income at abrdn in Singapore, said: “Most foreign managers will be tempted by Treasury yields at this moment. However, if you factor in the volatility in these markets, I think China makes a lot of sense.”
He added: “We still think it’s a good market to bet on China’s structural slowdown.”
China’s bonds have rallied in recent months as stuttering economic growth and the threat of deflation fuelled bets on further policy easing.
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The securities have also benefited from haven demand as a sell-off in local stocks bolstered the attraction of fixed-income assets.
While China’s bonds have long been detached from their global peers, the current divergence – based on the spread between US and Chinese 10-year yields of more than 230 bps – is near the widest in over two decades.
In addition to the different policy cycles, Chinese bonds have also become less correlated with their global peers as overseas investors exit the market due to fears of growing geopolitical tensions.
Foreign ownership of China’s government debt fell to 7.5 per cent at the end of March, near the lowest level since 2018, according to Bloomberg calculations based on official figures. Some investors said Chinese bonds are looking less attractive now that yields have fallen so much compared with their overseas counterparts.
“Given the extent of the correction seen in US Treasuries, it is becoming less compelling to add further to China government bond positions,” said Jason Pang, Asia foreign-exchange and rates portfolio manager at JPMorgan Asset Management in Hong Kong. “We are considering a reallocation of China government bonds into US Treasuries or other Asian rates markets to capture value creation.” The rally in Chinese bonds hit something of a speed bump last week after a People’s Bank of China (PBOC) official was cited by a local newspaper warning about a potential reversal in the trend of falling yields.
While acknowledging the central bank’s impact, Goldman Sachs Group said it still expects yields to stay relatively low over the longer term.
“The PBOC may guide bond yields to move higher gradually amid the issuance of ultra-long-term central government special bonds and further growth recovery, but a shift of the policy stance into tightening mode remains unlikely,” analysts at the investment bank including Xinquan Chen wrote in a research note.
“For the long term, we expect interest rates to remain low, given weak credit demand amid the prolonged property downturn and the ongoing, likely multi-year efforts to address local government debt risks,” they wrote. BLOOMBERG
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