Chinese bonds sail a sea of uncertainty

Bonds 7 minutes to read
Picture of Althea Spinozzi
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Volatility is up across asset classes as markets try and re-price what was long thought to be something approaching a done deal between Beijing and Washington.


Just as the market was getting comfortable with better-than-expected economic data and supportive central banks, trade talks took a nasty turn as Trump threatened China with higher tariffs. 

For investors, the main question is whether this uncertainty will put a meaningful dent in the multi-asset rally that has been in place since early January, as well as whether the selling represents a buy opportunity.

Although it is impossible to speculate how the China-US trade talks will proceed, the sudden market chop validates Saxo Chief Economist Steen Jakobsen’s False Stabilisation thesis, which holds that policymakers have created a largely illusory low-vol bubble that has continually pushed investors towards riskier assets. 

Investor confidence and positive data surprises from Beijing combined to push Chinese onshore government bond yields higher throughout April, but the current trade deal issues have seen them head south from their end-of-month peak.
 
Chinese bonds
Chinese onshore sovereign debt: an opportunity for EM investors

Rising onshore Chinese sovereign yields constitute a buy opportunity for many emerging market investors, especially if they are looking for safety amidst increased trade war uncertainty. Even if an agreement is reached, we believe that China is still far from fully consolidating its economic stability, and that the government will need to continue to support growth through fiscal and monetary policy. This means that Chinese sovereigns will be supported for longer. 

In the past, CGB have proven to be less correlated to other major bond markets while offering higher risk-adjusted returns; these instruments are thus are a great diversification tool.

Another important factor to support Chinese onshore sovereigns’ valuation is the gradual opening of the Chinese bond market through increased foreign demand. Already in April, CGBs have seen higher participation by offshore funds via their inclusion in the Bloomberg Barclays Global Aggregate index, with other indices set to include them as well.

Chinese corporate debt: if weakness persists, buy opportunities may arise

As many investors don’t feel comfortable participating in the onshore Chinese market due to the fact that they will need to take an exposure to the Renmibi as well, many will be looking at the Chinese corporate bond market wondering if the selloff in the past couple of days can be seen as an opportunity to take on some more risk.

Although our outlook on the Chinese bond market remains positive, the Chinese corporate space is restructuring, and this is pushing many smaller, weaker companies to default. This is why it is important to pick up risk selectively and to focus on the largest and most liquid Chinese institutions.

This week has seen a sell-off across both investment grade and high yield corporates in the wake of Trump’s weekend tweets. More valuation downside is a distinct possibility, depending on long the uncertainty persists.

Because the corporate bond market is not as liquid as the sovereign one, there may be some lag between rising sovereigns and widening corporate spreads. As such, it’s important to assess the real impact of the selloff in credit spreads. In the meantime, however, investors can look at the yield provided by Chinese corporates in EUR and USD for a gauge of when it’s the right time to buy. 

E-commerce is one of the sectors we like the most in China, as it represents 35% of the overall retail markets with that share is expected to increase significantly in the next few years. Within this space we see JD.com in USD offering 3.2% for a bond with maturity April 2021 and coupon 3.125% (US47215PAB22); for clients looking to go longer in maturity terms, the USD JD.com with coupon 3.875% and maturity 2026 (US47215PAC05) offers a yield of 4.2%. 

Remaining in the USD space, investors can find various issuances of Alibaba offering a yield of around 3% for maturities between 2021 to 2024. To pick up some more yield on this name, however, it necessary to go longer in maturity. Alibaba 3.4% with maturity 2027 in USD (US01609WAT99), for example, offers 50 basis points with a yield of 3.6%. 

It is important to note that while the majority of the bonds mentioned above have fallen in price into this week, they have all seen some degree of recovery as well. Credit spreads in the IG space are still supported, and it may take a little bit more volatility and uncertainty for prices to trade lower. 

This is why patience is key.

Sectors that will be more volatile as uncertainty extends are car manufacturing, semiconductors and shipping; these sectors are more sensitive to tariffs, and we recommend that investors remain cautious until the trade deal situation is clarified.

It is not at all easy to find Chinese corporate bonds in EUR. Although Chinese corporates provide an interesting pick-up over the bund, yields are very low and not many Chinese bond corporates issue debt in EUR. As such, we recommend USD issues.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.