BNY Mellon increases buying of Chinese onshore bonds as further market opening eyed

BNY Mellon Investment Management has increased its purchases of Chinese onshore government and policy bank bonds in the past month because of expectations that an acceleration in the pace of the opening up of the nation’s capital markets will fuel more foreign participation in the debt market.

Last year, Chinese onshore bond yields surged between 85 and 105 basis points across the curve because of concerns the government’s campaign to curb risky lending would tighten liquidity.

But yields have since retraced, falling between 25 and 86 basis points this year, reflecting market bets that the worst of the clampdown was probably over. The People’s Bank of China’s decision to cut banks’ reserve requirement ratios last week also signalled that it did not want to completely choke off funding to companies.

The decline in Chinese bond yields has narrowed their premium over US Treasuries, due to the divergence in monetary policies. The 10-year Treasury yield hit the 3 per cent level this week, narrowing its spread with Chinese counterparts to 63 basis points from last year’s peak of 171 basis points. The five-year US-China bond yield spread has narrowed to 37 basis points, and is poised to disappear soon.

“The bond market confirms China’s ascent. Tightening spreads show that foreign investors would rather hold Chinese bonds than US bonds,” said Robert Simpson, London-based portfolio manager at Insight Investment, a subsidiary of BNY Mellon. “We have invested in Chinese bonds in the last 18 months, and have increased our allocations in the last few months.”