A rally in China’s government bonds prompted by the deadly coronavirus outbreak has rewarded big US and European investors that have bet on a slowdown in the world’s second-biggest economy.
Chinese bond yields have fallen to four-year lows as investors turn to the safety of sovereign debt because of the spread of the disease, known as Covid-19. Investors are expecting Beijing to unleash more stimulus as it seeks to cushion the economic blow from the epidemic.
China’s 10-year Treasury yields, which fall as prices rise, have sunk more than 25 basis points to 2.87 per cent since the start of the year. That rally accelerated in late January as Chinese authorities ordered businesses to shut, stoking fears of a sharp economic slowdown. Yields have not been below 3 per cent since 2016.
“We’re . . . still very bullish on Chinese bonds across the board,” said Hayden Briscoe, Asia-Pacific head of fixed income at UBS Asset Management. The Swiss bank had already forecast China would have to increase stimulus to support its slowing economy prior to the epidemic. “Before . . . the virus we had expected yields to drop with slower [economic] activity,” he added.
Mr Briscoe expects that the People’s Bank of China will cut its key medium-term lending facility rate by a total of 50 basis points as it seeks to arrest the slowdown. The central bank reduced the MLF rate, a benchmark for interbank lending in the country, by 10 basis points on Monday. The loan prime rate, a related benchmark for commercial lending, is also expected to fall 10 basis points on Thursday, according to Bloomberg estimates.
Also benefiting from the bond surge is Switzerland-based Pictet Asset Management, which increased holdings of long-dated Chinese government debt before the lunar new year at the end of January.
“The outbreak will inevitably [affect] China’s economic growth, prompting authorities to ease monetary conditions,” said Cary Yeung, head of greater China debt at the firm. He noted that yields on five-year Chinese government bonds are currently more than 100 basis points higher than those on equivalent US debt. Yields on similar tenor German and Japanese government bonds are currently zero or negative.
Julio Callegari, a portfolio manager at JPMorgan Asset Management in Hong Kong, said he expects a roughly 10-15 basis point move lower in Chinese bonds, pushing yields to as low as 2.7 per cent, thanks in part to strong foreign inflows.
Net foreign flows into China’s interbank bond market picked up last month, rebounding from a drop in December. Overseas investors increased their holdings by $14bn to a record $2.2tn by the end of January, according to figures from Bond Connect Company.
JPMorgan is set to begin including Chinese government debt in its benchmark indices from the end of February, which is likely to further bolster demand from foreign investors.
However, some big investors are cautious over how much further bond yields in China can fall. Wilfred Wee, a portfolio manager at Investec Asset Management, took a long position in Chinese government bonds at the end of 2019. But he believes the PBoC will refrain from going full throttle on monetary easing, such as by slashing its one- and five-year benchmark rates, out of fear it could inflate a bubble in the property market.
“Chinese bond yields will have a tendency to grind lower, but it will be floored by fairly conservative monetary policy and easing,” Mr Wee said.
Source: Economy - ft.com
