Greater China Sales Traders
Summary: Bonds in China have so far been a safe bet for most investors even if the month started off with risk-on appetite. As uncertainty becomes more and more of a familiar face at times where trade tension can change day by day, CGBs have once again step up as an attractive investment selection for traders to counter turbulent market conditions.
Government bonds: yields are relatively more attractive
For the first half month of Jul, government bonds were not favored. Reasons are three-fold: 1. Economic data was satisfying; 2. The optimism developed on back of US-China trade talk resumption; 3. Market trying to digest away the possibility of 50pips rate cut. However, with further developments in economic performance especially on the manufacturing side, bonds were persued for safety purpose. Approaching end of month, intensified China-US trade woe and less dovish FED were fanning worries about global economies. Global yields slumped with safety demand piling up. US yield has dropped to a low since 4Q of 2016, Germany has reached negative yields for all tenors up to 10 years. Comparingly, China 10y government bond is still posting attractive yields above 3%.
Looking forward, with equity market riots seem here to stay with global uncertainties developed from US-China trade tension. US has tagged China to be a currency-manipulation country after USDCNH breaks 7 level. This will affect global demand. In the meantime, US fundamentals are not improving, and credit impulse suggested that Aug would be the time for US to show slowing down momentum. More easing signal could come into play with current bearish sentiment in the market. safety heavens will continue to gain traction.
China 10yr yields in this case is very attractive, especially when RMB has weakened and forward points are not so significant (1yr points less than 500). The demand for this is also fundamentally supported in the long term as Chinese government is believed to be ready to support the economy when needed. The further opening up of Financial sector in China announced on Jul 20 is also helping to increase foreign participation in China bond market.
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.
Bond connect flash report
Content from BOND CONNECT:
At the end of July, a total of 1134 institutional investors from 30 different jurisdictions have enrolled in the Bond Connect scheme. This has passed the “1100” milestone as 96 global institutional investors were onboarded in July 2019. The US and Hong Kong accounted for 32% and 25% of the overall investor base respectively. The scheme has onboarded 59 out of the top 100 global asset managers, with more in the pipeline.
Total trading volume of Bond Connect increased to RMB 201.0 billion, while the average daily turnover was RMB 8.74 billion in July. Global investors were net buyers of Chinese bonds for RMB 52.7 billion. Policy financial bonds, Chinese government bonds and NCDs were still the focus of investors with turnover of RMB 83.9 billion, RMB 52.7 billion, and RMB 52.5 billion respectively, accounting for 41.7%, 26.2%, and 26.1% of the monthly trading volume. In terms of tenor, bonds with maturity from 7 to 10 years and under 1 year remain the most attractive, taking up 38.0% and 31.2% of total activities.
A total of 47 onshore dealers with Chinese and foreign backgrounds are now available in Bond Connect to provide market liquidity. Live streaming of indicative prices was introduced on Tradeweb and Bloomberg to help investors gain accessibility to a wide source of dealer quotations for reference in counterparty selections.
Bloomberg launched the pre- and post-trade allocation functionality and the support for ABS trading among other types of cash bonds, leveling the service offering for both e-trading platforms of Bond Connect. Tradeweb started to provide the iDeal Chat, a messaging tool developed by CFETS, for investors to communicate instantly with onshore dealers. The minimum RFQ size was also reduced from RMB 100,000 to 10,000 to facilitate investment needs of investors.