Login Open account
International
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider.
Show more
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.
Show less
By using our website you agree to our use of cookies in accordance with our cookie policy.
Okay
background image background image background image

Why Chinese government bonds are crucial

Bonds 5 minutes to read
Picture of Althea Spinozzi
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  The moment for which many people have been waiting is finally here: Saxo Bank is releasing Bond Connect.

The Saxo platform will give institutional clients the opportunity to trade Chinese onshore government bonds, central bank paper and much more, putting clients in direct contact with counterparties providing liquidity on Bond Connect. 

This means that Saxo Bank’s institutional clients will be able to access a market long closed to foreign investors, as well as one that is destined to see activity increase dramatically as international investors come to understand the importance of the Chinese bond market, and Chinese government bonds in particular.

Chinese government bonds were one of 2018’s best-performing sovereigns. The yield on the 10-year CGB has plummeted from 3.9% at the beginning of 2018 to near 3% at the beginning of 2019, amid December’s equity sell-off, tighter global financial conditions, and rising political uncertainty due to the Sino-US trade war, among other factors.

The behavior of CGBs throughout last year demonstrates that these sovereigns are assuming a safe-haven role. In a period where we believe that volatility is going to rise as we get closer to recession, these sovereigns can provide a nice buffer within a diversified portfolio.

Another thing to note is that the Chinese sovereign yield curve has steepened considerably within the past year, where we saw a “bull steepener” in which short-term yields fell faster than their longer-term counterparts.

Short-term yields have been pushed lower due to the current economic and political uncertainty. This is a signal that investors are forecasting further unrest. This takes away some of the convenience of being invested in short maturities, especially as US Treasury yields in the short part of the curve are somewhat comparable. In fact, while the two-year CGB offers a yield of 2.61%, the two-year Treasury offers 2.51%, just 10 basis points off the CGB.
yield curve
Source: Bloomberg
Comparing CGBs and Treasuries, investors might be concerned that the yield pickup in CGBs is very low. However, investors should bear two very important factors in mind:

1. The People’s Bank of China may want to intensify its easing efforts. At the moment, there are ongoing talks on how the Chinese government might stop an economic slowdown. Until now, the PBoC has injected extra liquidity into the banking system in the hope that the banks would lend to the small- and medium-sized enterprises that have suffered most from the trade war. 

However, banks have not been able to lend as much as desired due to concerns about high debt levels and credit quality among borrowers; most of the time, they simply buy bonds in the financial markets. Market participants are wondering whether the PBoC will need to expand its easing efforts in order to avoid a deepening crisis. 

Although the PBoC is banned from buying government bonds, leading many to believe US-style QE is impossible in China, we believe that it will seek to walk that path if necessary. Before that point, though, the bank will try to make its existing monetary policy more effective. Either way, we can expect PBoC measures to support the bond market’s valuation pushing CGB yields lower.

2. There might be some upside in holding renminbi against USD. The US dollar is still trading at a 15-year high, and with the US on an easing path we can expect the dollar to correct. At the same time, it is in China’s interest to keep the renminbi stable to avoid chaotic devaluations and to continue to attract capital.

Although it seems as though CGB have rallied significantly with only a little room for further appreciation, investors should consider the above while keeping in mind that foreign investors gaining more and more access to a previously closed market will play in favour of CGB holders.

In April of this year, the Bloomberg Barclays Global aggregate index will include CGBs and policy banks’ bonds and onshore Chinese sovereigns will represent the index’s fourth-largest currency component in the index after the US dollar, the euro and the Japanese yen. CGBs are on track to becoming a fundamental component of clients’ portfolios and investors should embrace them.

Quarterly Outlook Q3 2023

AI: The good, the bad, and the bubble

AI: The good, the bad, and the bubble

  • Steen image 250x200

    AI: The good, the bad, and the bubble

    While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.

    Steen Jakobsen,
    Chief Investment Officer

    Read article
  • Peter image 250x200

    Equities: The AI fever pushes market to new extremes

    The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.

    Peter Garnry,
    Head of Equity Strategy

    Read article
  • Redmond

    China faces challenges from generative AI amidst the fragmentation game

    As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.  

    Redmond Wong,
    Market Strategist

    Read article
  • Charu image 250x200

    Japan’s riposte to aging and productivity headwinds: robots with generative AI

    Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.  

    Charu Chanana,
    Market Strategist

    Read article
  • Oskar image 250x200

    Is AI the new crypto?

    The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.

    Mads Eberhardt,
    Cryptocurrency Analyst

    Read article
  • Hans image 250x200

    Artificial Intelligence: a promising gamechanger for the portfolio?

    Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way. 

    Hans Oudshoorn,
     Trainer Academy

    Read article
  • John image 250x200

    FX: The USD smile and the JPY dam break

    The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.

    John J. Hardy,
    Head of FX Strategy

    Read article
  • Ole image 250x200

    Commodities: Bottoming out?

    While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.

    Ole S. Hansen,
    Head of Commodity Strategy

    Read article
  • Chris image 250x200

    Fixed income: To hike or not to hike, that is the question

    As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.

    Althea Spinozzi,
    Senior Fixed Income Strategist

    Read article

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)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

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

Contact Saxo

Select region

International
International
Products & pricing
Platforms
Accounts & service
General
Other
Legal

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.