China debt: government bonds defy global turbulence as US Treasuries lose ‘safe haven role’

Chinese government bonds have defied the turbulence rocking peers from Australia to Europe, offering a port in the global reflation storm.

Foreign fund bought 93.6 billion yuan (US$14.4 billion) worth of Chinese debt in February, after adding positions at a record pace the previous month

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Foreign fund bought 93.6 billion yuan (US$14.4 billion) worth of Chinese debt in February, after adding positions at a record pace the previous month, egged on by the addition of China’s government and policy-bank bonds into the world’s major indices in 2019. Photo: Shutterstock

Published: 10:22am, 12 Mar 2021Updated: 3:16pm, 12 Mar 2021

An upstart contender to US Treasuries has emerged in the wake of last month’s vicious debt rout. Chinese government bonds have defied the turbulence rocking peers from Australia to Europe, offering a port in the global reflation storm.

JPMorgan Asset Management and Brandywine Global Investment Management LLC are among those who now see them mimicking the resilience that has afforded US government debt the status of the world’s safest asset in times of crisis.

The nation’s 10-year yield has been wedged in a tight seven basis-point range over the past month, even as price swings in the rest of the bond world have broken out. While that does not automatically make Chinese bonds the go-to bulwark against volatility, it helps explain why a market once closed to most international investors is emerging as a shock absorber in wild pandemic trading.

“At times when you’re seeing volatility in the developed markets like you’re seeing now, it’s a good place to keep your cash,” said Arjun Vij, who co-manages JPMorgan Asset Management’s US$1.6 billion Global Bond Fund. “China government bonds are as good an asset as US Treasuries when looking at long-term correlations versus global stocks.”

Casting Chinese debt as a viable asset class for trillions of US dollars in savings is controversial, given liquidity and accessibility issues as well as currency risk. But since it is only very loosely correlated with other bond markets, it makes for a nifty hedge, the thinking goes, especially when the rest of the world’s biggest bond markets are getting clobbered in tandem.