Subdued Yield Level Makes No Harm to the CGBs Outlook


Greater China Sales Traders

Summary:  Bond yields in China tested key level in August as global yields were under pressure from worldwide central banks were getting dovish. The new LPR facility rolled out by PBOC added funding strength to both equity and fixed income markets alike. Meanwhile, Bond Connect volume reached another record high in the month.

China bond markets

Government bonds: short term yield recovery

As expected, China sovereign yield tested 3% level and even broke that level briefly at mid Aug, as yield hunting globally has driven demand on China bonds. It can be seen that foreign bond buying activities picked up significantly through CIBM and bond connect. However, FED managed to maintain its independency, even just for now, has managed to keep market’s expectation on yields to hold for now. China has carried out multiple actions to marketize funding rates, such as Loan Prime Rate, to drive up bank’s willingness to lend to SMEs. The act itself was supposed to drive the rates down, however speculation of Chinese government will continue to implement fundamental support to its economy has brought some confidence to its stock market. Demand for safety assets is lower so yields recovered moderately.

However, China-US trade woe is not going away, with both sides not backing up much. Tariffs were increased on 1st of Sep and another batch is planned in Dec, for both sides. Global yields are taking a breather in reaction to Fed’s trying to talk down the possibility of major rate cuts. However economic situation is not improving much. Geopolitical uncertainties loom, with middle east is at the verge of breaking out military action, new British government is looking to have a hard Brexit, ect. Safety assets are not given up, just that markets were seeking better returns, temporally. As market now is quite fragile, any break out is possible to lure capital into safety asset again. Chinese government bonds seem to be a good choice, after all, the yields are still not bad.

source: Bloomberg

On one hand, Chinese government aims to increase funding flow to SMEs from banks. On the other hand, deleveraging is here to stay. Therefore, we are cautious towards the Chinese corporate bond market for the simple reason that it is not clear how credit market is going to be impacted by possible defaults. In addition, it is uncertain 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 Aug, a total of 1244 institutional investors have enrolled in the Bond Connect scheme, with another 110 joined. The scheme has now onboarded 61 out of the top 100 global asset managers, with more in the pipeline.

Total trading volume of Bond Connect increased to another record high of RMB 338.6 billion, a 68.5% increase from last month. Trading in policy financial bonds, Chinese government bonds and NCDs remained dominant, with turnover of RMB 188.6 billion, RMB 97.8 billion, and RMB 44.1 billion respectively, accounting for 55.7%, 28.9%, and 13.0% 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 43.2% and 21.6% of total activities.

Bond Connect started to offer T+3 settlement cycle with effect from 23 August 2019, enabling global investors to choose from T+0, T+1, T+2, or T+3 settlement for Bond Connect trades at their own discretion. The extension to longer settlement cycle facilitates the flexibility for international investors to tap into the Chinese fixed income market. The new function is now available on Tradeweb and Bloomberg’s trading interfaces.


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