Foreign investors maintain optimistic views on Chinese debt after Beijing crisis reconciling tilt, although most consider the current rally to be more or less over.
JPMorgan Asset Management, Fidelity International and Pictet Asset Management do not see benchmark yields falling much further than 2.9% -3.0%, but see bonds as attractive due to their low correlations with the rest of the world and of their premium over their peers. UBS Asset Management is more bullish, saying China’s 10-year yield – which fell to a 12-month low of 2.93% after Beijing’s switch to monetary easing last week – could fall by 100 basis points to hit a record high if officials cut rates this year.
Chinese government bonds defied expectations of a year-round sell-off, as global investors grabbed debt to take advantage of their yield premium to the rest of the world and the potential for the market to strengthen. yuan. Foreign funds have been net buyers of onshore sovereign notes for all but one month since the start of 2020, pushing holdings to an all-time high in June.
The spread between the Chinese benchmark bond and the US equivalent narrowed to 153 basis points from a peak of over 250 basis points in November. The 10-year Chinese sovereign bond yield climbed one basis point to 2.93% Wednesday afternoon in Asia. The country will release economic data on Thursday, including the second quarter gross domestic product, as well as retail sales and industrial production for June.
Here’s what a selection of foreign fund managers are saying about Chinese bonds:
Julio Callegari (Portfolio manager, JPMorgan Asset Management)
- Structural factors, such as inclusion in the global Chinese bond index, will justify foreign participation, and this will not be altered by Beijing’s conciliatory tilt.
- Slightly more accommodative monetary position may slightly increase foreign interest
- Since China’s reserve rate decline is ‘measured’, the country’s 10-year yield will not drift much lower than 2.9%
- The yuan will trade around current levels against a basket of currencies
- Lower reserve requirement ratio is not a change in policy, with deleveraging remaining a priority
- “The reduction in the RRR reflects the efforts of policymakers to support the Chinese economy amid recent signs of moderating growth and stress in parts of the credit market,” he said. “A reduction in the RRR shows that policymakers are aware of the risks and will act to prevent any major deceleration.”
Morgan Lau (Fixed Income Portfolio Manager, Fidelity International)
- China’s 10-year yield will not go much lower than 3% and will be tied to the beach medium term
- “It’s always a good time to buy” when the yuan is stable and 10-year bonds return around 3%
- The People’s Bank of China is unlikely to renew the 400 billion yuan medium-term loan facility that will mature on Thursday
- China will monitor market reactions before taking further easing measures; it can give guidance to banks, for example asking them to lend more to small and medium-sized enterprises and to limit lending between them on the interbank market
- The attitude of the PBOC towards its monetary position has not changed – it is still cautious
- “If we see the economic situation change or more of a resurgence of Covid-19 in China, we could potentially see a rate cut,” he said, adding that untargeted monetary easing could induce pressure. inflation and a larger wealth gap.
Cary Yeung (Head of Chinese Debt, Pictet Asset Management)
- “Foreign investors will continue to be interested in Chinese bonds given their decorrelated nature with global asset classes, which bodes well for diversification.”
- “Additionally, Chinese bond yields are still high relative to developed market bond yields, especially under contained inflationary pressure from China.”
- Bond yields will stabilize at current levels in the absence of any surprises in economic data
- The RRR cut is a “minor” adjustment to the PBOC’s monetary policy in response to the moderation of the economic recovery
- The appreciation of the yuan could pause in the short term; Longer term, the currency is still supported by strong exports, a continued influx into Chinese capital markets and the limitation of overseas travel.
Hayden Briscoe (Head of Fixed Income for Asia-Pacific, UBS Asset Management)
- Foreign investors will continue to buy Chinese bonds, which “tick all the boxes,” including their low correlation with notes sold in other countries and their high yields
- China will want to see the yield premium on its government bonds over US Treasuries decline, as this will ease the pressure on the yuan to appreciate.
- Chinese bond movements lead the world by six to 12 months
- China will likely ease further to support growth; PBOC will likely reduce benchmark lending rate by the end of this year
- The yield on 10-year government bonds will fall by at least 25 basis points over the next three months; it could drop 50 to 100 basis points if China cuts rates
– With the help of Y-Sing Liau
(Adds fourth paragraph performance level and China’s plan to release economic data on Thursday)