As investors fled almost every fixed-income asset from the safest government bonds to the highest-yielding securities last week, one market stood out as a haven.
Funds poured $671 million into exchange-traded funds tracking yuan bonds last week, taking inflows so far this year to $2.2 billion, data compiled by Bloomberg show. In contrast, they offloaded almost $600 million of emerging-market notes last week.
China’s bonds have largely escaped the tumult in global debt markets, with yields on the benchmark holding firm on Thursday while that on Treasuries soared more than 20 basis points. Chinese sovereign notes were the third-best performer globally in February, according to data from indexes compiled by Bloomberg and Barclays Plc.
“China bonds are likely to be a safe haven now — stable policy and growth make them less volatile compared to global peers, while yields are also more attractive,” said Xing Zhaopeng, a senior China strategist at Australia & New Zealand Banking Group Ltd. in Shanghai. “The notes’ relative performance this year will be better than bonds sold by other major economies.”
With strategists warning of more volatility in the days ahead, investors may find safety in the more-insulated Chinese debt market where fears of sudden monetary tightening are less prevalent. The authorities’ successful containment of the coronavirus outbreak has also allowed the economy to rebound more quickly.
China’s benchmark 10-year yield fell two basis points to 3.26% Monday while 10-year bond futures jumped 0.3%, the most since December. The spread between the 10-year Chinese yield and its U.S. counterpart was at 1.82 percentage points on Monday. This compares with a five-year average of 1.25 percentage points.
EPFR Global data showed China bond funds absorbed record flows in the week ended Feb. 24, with investments almost breaching the $2 billion mark.
Other large Asian economies such as Indonesia and India do offer higher returns, but they remain vulnerable at times of stress, with major ratings agencies assessing China’s debt as four-to-five levels more sound.
And while other countries are still in the process of selling near-record amount of debt to fund stimulus, China’s faster-economic recovery means there could be less supply. Economists expect the government to lower its fiscal deficit target, while cutting its quota for special local bonds.
The iShares China CNY Bond UCITS ETF, which tracks the Bloomberg Barclays Index of Chinese government and policy bank debt, saw the largest inflows among all similar contracts this year, data compiled by Bloomberg showed. The fund gained 8.8% over the past year, beating most global peers.
The Bloomberg Barclays China Aggregate Index, which tracks the performance of the yuan-denominated debt, is up 1.5% year-to-date, while the global aggregate index is down 2.6%.
Overseas investors are also buying more Chinese notes directly. In January, they purchased $27 billion of bonds in the interbank market, the most according to data going back to 2014. Sovereign securities accounted for $19 billion of the total inflows.
