BONDS

Government bonds: still an opportunity for investors

Greater China Sales Traders

While sovereigns world-wide have been enjoying of solid performances driven by the fear of a trade war between the US and China and dovish central banks, Chinese government bonds’ performance year to date has disappointed investors. As a matter of facts, the return on Chinese government bonds year to date is close to zero. Our bond strategies Althea said that, the poor performance of these sovereigns might have been caused by two factors. First, by the fear that a credit crunch could have shaken the Chinese economy especially after the government seized for the first time in 18 year a small private lender in order to avoid its default. Secondly, by an unanticipated escalation of a trade war between the US and China.

Regardless, she also mentioned that we have reasons to believe that Chinese sovereigns will rise in the long term for several reasons. Firstly, the People Bank of China is clearly ready to do whatever it takes to support the economy. Secondly, the demand for Chinese government bonds might further increase now that these securities clearly offer a more attractive yield compared to sovereigns worldwide. As we mentioned in earlier articles, Chinese government bonds are less correlated to global sentiment and they represent a good option for investors looking to diversify their portfolio. This should drive demand for CGBs higher.

On the other hand, we are cautious towards the Chinese corporate bond market for the simple reason that it is not clear how a financial crisis will affect domestic corporates while remaining quite vulnerable to external factors such as a global economic slowdown and an escalation of the trade war. In case investors are looking for securities that can provide a pick up over Chinese government bonds, we believe that supranational institutions are still the safest and best way to gain a few basis points over CGBs while avoiding risk in the Chinese corporate bond market. Among these, according to the trade view posted on the 29th of March, we continue to like bonds issued by the Export-Import Bank of China which are offering 50bps over CGBs.

Bond connect flash report

By the end of June 2019, the total number of international investors registered on the Bond Connect scheme hit the “1000” mark to a total number of 1038 investors, with another 91 investors onboarded. up 106% from 503 investors ending 2018. In June, Bond Connect welcomed the investor from Abu Dhabi, expanding the coverage to 29 jurisdictions globally. The scheme has engaged 62 out of the top 100 asset managers, including 58 already onboarded and 4 in the pipeline.

Trading activities continue to break records in terms of total trading volume, rising to RMB 172.2 billion in June 2019 from RMB 158.6 billion last month, with average daily turnover RMB 9.06 billion, and the highest single day turnover at RMB 16.2 billion respectively. Global investors were net buyers of Chinese bonds for RMB 36.7 billion. Policy financial bonds, NCDs, and Chinese government bonds remained as focus with turnover of RMB 81.0 billion, RMB 54.3 billion, and RMB 27.4 billion, respectively, accounting for 47%, 32%, and 16% of monthly trading volume. In terms of tenor, bonds with maturity under 1 year and from 7 to 10 years remain most attractive, taking up 39% and 36% of the activities. More details in the report.

In the primary market, 34 new issues equivalent to RMB 141.5 billion were marketed via Bond Connect in June 2019.

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