By Robin Marshall, director, Fixed Income Research, FTSE Russell
Chinese government bond spreads stand near multi-year highs vs G7…
Chinese government bond yield spreads are still near multi-year highs despite the recent backup in US Treasury yield (which has now extended to some Asian markets). Chinese spreads widened sharply relative to G7 peers in 2020, as policy diverged substantially, and government bond yields elsewhere collapsed; despite some marginal narrowing recently, 7-10 year Chinese government bond yields are still some 400 basis points above 7-10 year Bund yields, and 300bp above World Government Bond Index (WGBI) yields as Chart 1 shows.
Chart 1: Chinese govt bond spreads stand near multi-year highs
Source: FTSE Russell, data as of January 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
….after PBoC eased interest rates only modestly in 2020
The extent of the rebound in Chinese government bond yields in 2020 may be seen in Chart 2. China came out of the pandemic much faster than its G7 counterparts and therefore, after initial 10bp and 20bp cuts in March and May, the PBoC kept monetary policy neutral for the rest of 2020, also anxious to prevent the credit boom accelerating. In contrast, the US Fed eased rates 175bp in 2020, the Bank of Canada 150bp, and the Bank of England 65bp. Consequently, Chinese yields have backed up, mostly reverting to their historical means, unlike their G7 peers, where yields still remain very low.
Chart 2: Chinese government bond yields since 2018
Source: FTSE Russell, data as of January 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
…but Chinese bond returns are now benefiting from high yields, as US yields rise
But the high relative level of Chinese government bond yields appears to be drawing increasing international investor interest (with foreign ownership steadily increasing to about 10% at end-2020). This may have helped the market deliver positive returns over the last three months, unlike US Treasuries and other Asian markets more strongly correlated to the US (like Korea), where bond yields have backed up in the global reflation trade. As the performance data in Chart 2 shows, US Treasuries delivered negative returns of 1% in US dollar, and 5% in renminbi terms in the last three months, and Korean and Japanese conventional bonds about 4%. In contrast, China, alongside Indonesia and Australia, is among the top performing markets, gaining 1% in renminbi terms and, nearly 5% for a dollar-based investor.
Source: FTSE Russell, data as of January 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
…and low correlation with G7 bond markets and yields
The other key conclusion from the movement in Chinese government bond spreads and performance data in 2020/21 is that the correlation of Chinese government bond returns to G7 government bond markets remains low (see Chinese Government Bonds, Characteristics and Evolution, FTSE Russell, July 2020), even if foreign participation is steadily increasing, after recent reforms.
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