China’s Bond Drop Is Luring Large Global Funds Back Into Market

Global investors are once again warming up to Chinese government bonds, after a selloff driven by a rotation into stocks sent yields to multi-month highs.Allianz Global Investors has added Chinese bonds that are more sensitive to changes in interest rates, on expectations that further monetary easing to support the economy will eventually push yields lower. AllianceBernstein is turning overweight as 10-year yields approach 1.9%, while Aberdeen Investments is also considering additional debt purchases.

The renewed appetite for Chinese bonds shows investors are ready to snag bargains, with yields on benchmark 10-year bonds now near the highest since December. Data showing the fragile state of the Chinese economy and concerns that the front-loading of exports earlier in the year may not sustain are also raising questions on the extent of the bond selloff.“Additional policy easing will likely be required as soft economic data feed through and the temporary boost from front-loaded exports fades,” said Jenny Zeng, deputy chief investment officer for fixed income at AllianzGI, which has $659 billion of assets under management.

She plans to add more Chinese government bonds if onshore risk sentiment deteriorates.

China’s 10-year yields slipped slightly to 1.87% on Thursday, after rising to a nine-month high of 1.9% in the previous session. The benchmark yields are set to gain by a quarter of a percentage point in the three months ending September, the most since 2020.Chinese bonds, which were seen as the surest bets for returns earlier in the year due to persistent deflation pressures, are facing headwinds as Beijing’s campaign to cut overcapacity and better trade relations with the US spur demand for riskier assets like stocks. JPMorgan Chase and Co. and AllianzGI were among firms that took profit from Chinese bonds in the past few months to take advantage of the momentum in equities and after the People’s Bank of China lowered rates in May.Proposed changes to mutual fund fees and a tax on interest income from newly issued bonds continue to pose headwinds for bond gains. JPMorgan and UBS Asset Management are choosing to stay neutral on Chinese bonds with yields below historical levels and as the momentum in stocks sustains.

However, Alliance Bernstein has gradually changed its assessment on Chinese bonds to overweight from neutral last month, citing flush liquidity conditions in the banking system.“When you see the front-end liquidity, it is still very ample and well anchored,” said Eric Liu, director of Greater China portfolio management at the firm with $829 billion of assets under management as of end June. “Current levels with 10-year at 1.9% are attractive.”

Edmund Goh, investment director of Asia fixed income at Aberdeen, sees 10-year yields as appealing at the current level and 30-year at 2.2%. He expects persistent deflationary pressures and limited fiscal expansion to continue to buoy the bond market.“At this level, I’m tempted to add,” said Goh whose firm has $499 billion of assets under management. “The selloff has gone beyond fundamentals. The structural story is still a deary story for China.”

Source: Bloomberg Europe