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

Decline in Chinese bond yields has narrowed their premium over US Treasuries, reflecting their increasing attractiveness to international investors

PUBLISHED : Thursday, 26 April, 2018, 8:45pm
UPDATED : Thursday, 26 April, 2018, 10:16pm

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.”

Chinese bonds draw foreign investors on upcoming global index inclusion

Separately, financial data and news provider Bloomberg’s announcement last month that it would conditionally add Chinese yuan-denominated government and policy bank securities to its global bond benchmark indices starting April 2019, was a major stamp of approval of their acceptance as mainstream fixed income investment, he said.

Chinese bonds are the top performers so far this year among 70 markets in the Bloomberg Barclays Global Aggregate + China index, calculated in dollars, attracting global attention as China increasingly opens up its US$12 trillion bond market, the world’s third largest, to foreign investors.

“China’s weight within our absolute return strategy is about 5 per cent. If you think about the size of China, that is quite low and it could go higher,” Simpson said.

Mark Tinker, head of AXA IM Framlington Equities Asia, said that with political power consolidated in China, the shift was to economic and market reform and the stream of initiatives being rolled out was building up to what was becoming a “big bang” for Chinese capital markets.

“There are now at least two competing cycles, as well as structural changes to consider. The PBOC is arguably now more relevant than the Fed for international investors,” Tinker said.