News Analysis: Foreign investors to buy more Chinese bonds as yield spread widens

Source: Xinhua| 2020-03-05 23:16:59|Editor: yhy
Video PlayerClose

by Xinhua writer Liu Yanan

NEW YORK, March 5 (Xinhua) -- Chinese bond yields will move up again after recent drops amid coronavirus concerns, and overseas investors are expected to buy more Chinese bonds to earn higher returns from the wide yield spread between Chinese bonds and bonds in developed markets, multiple research institutions have predicted.

China has seen the yield of its 10-year government bonds falling to less than 2.68 percent by Thursday from around 3.15 percent in the beginning of 2020 as yields of global bonds posted steep declines in the period, according to data issued by China's Ministry of Finance.


Growth uncertainty arising from the spread of the novel coronavirus outside China has recently caused investors to flock to the largest and most liquid bond markets of developed economies, namely U.S. Treasuries, German bonds and Japanese government bonds, according to macroeconomic research body MRB Partners.

Rampant risk aversion in the market drove down the yield of U.S. 10-year Treasury bonds to less than 1 percent on Tuesday for the first time in comparison with over 1.8 percent at the beginning of 2020.

Meanwhile, the yield of Germany's 10-year government bonds fell further into negative territory and stayed below negative 0.6 percent, down from around negative 0.2 percent earlier this year.

The yield spread between Chinese 10-year government bonds and U.S. 10-year Treasury bonds rose to 175 basis points as of Thursday, up from around 42 basis points a year ago, according to data from

Investors' risk appetite will be rekindled and they will again seek higher yielding bonds as investors recalibrate their assessment of growth prospects in 2020, said MRB Partners.

"In our view, they will conclude that while the immediate impact on Q1 (quarter 1) and possibly Q2 (quarter 2) is negative, there is no risk of global recession in 2020," said MRB Partners, citing positive developments in the fight against the novel coronavirus in China.

Low yields and interest rates, as well as dovish central banks in developed economies will "push" investors to seek better portfolio returns, noted MRB Partners.

Researchers with MRB Partners told Xinhua that the beneficiaries of this rotation will be high-yield segments in developed markets as well as emerging market bonds in general, in particular the highest yielder.

"We do think China bonds appear attractive to foreign investors given the yield pickup China offers versus developed market sovereigns," said Lucy Qiu, emerging markets strategist at UBS Global Wealth Management in a recent interview with Xinhua.

The yield of China's 10-year government bonds would trade between 2.8 percent to 3 percent during the first quarter of 2020 and increase to 3.3 percent by the end of 2020, Qiu said.

"We expect Chinese bond yields to recover from their current low levels during the course of 2020. While we do not make point forecasts, an end-2020 yield of 3.5 percent would be consistent with our growth expectations," said MRB Partners.


As J.P. Morgan started to implement its inclusion of Chinese bonds into its Government Bond Index-Emerging Markets (GBI-EM) indices on Feb. 28 and the process would take 10 months, the investment bank told Xinhua on Wednesday.

The inclusion by J.P. Morgan and GBI-EM indices and Bloomberg Barclays Global Aggregate Indices would bring hundreds of billion U.S. dollars into the Chinese bond market in the coming few years, according to analysts.

Within 2020, "we expect around 100 billion U.S. dollars of inflows into the Chinese bond market from passive inflows, active inflows (search for yield) as well as allocation shifts from reserve managers aiming to diversify away from USD assets," said Qiu.

The inclusions of China's equities and bonds into major international investment indices like MSCI equity indices and Bloomberg Barclays Global Aggregate Index could result in sizable additional inflows of around 450 billion dollars over the next two to three years, according to staff estimates by the International Monetary Fund (IMF) in August 2019.

"If China continues its incremental capital market opening and makes its currency regime more transparent, the estimate (by the IMF) errs on the low side," said MRB Partners.

Though offshore investors' interest in purchasing Chinese government bonds and policy bank bonds has slowed down since December 2019, "we believe the momentum would be restored soon as the inclusion in JP Morgan GBI-EM index is about to commence," said Janice Xue, an analyst with Bank of America Global Research.

However, offshore investors increased their holdings of medium-term notes by 12 billion yuan (around 1.7 billion dollars) in January, which showed a growing interest in China's credit bonds, Xue noted.

"We remain constructive on 10-year China government bonds on the back of an extended monetary easing cycle, uncertainties about the pace of growth recovery, and darkened external outlooks as COVID-19 is spreading quickly in some other countries," Xue said.

The share of China's bonds owned by overseas investors would continue to grow because the rest of the world, including central banks, as well as active and passive investors, remains structurally "underweight" in RMB assets, said MRB Partners.