Bonds 5 minutes to read

Why Chinese government bonds are crucial

Althea Spinozzi

Fixed Income Specialist, Saxo Bank

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.
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.
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

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

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.