BEIJING: Some of the world’s major bond funds are rekindling their love for Chinese government debt, as an unexpected rally in recent weeks took the 10-year yield to the lowest level since late 2016.
The asset management arms of The Pictet Group, UBS Group AG and BNP Paribas SA added China’s government and policy bank bonds on bets that the fatal outbreak of the coronavirus will take a toll on the country’s already-slowing economy. Its sovereign notes rallied the most in five years last week, as the impact of the disease raised hopes for more aggressive central bank easing.
China’s economy is under renewed pressure from shutdowns and disruption brought by the outbreak, which has claimed more than 1,300 lives. Last week, the People’s Bank of China (PBoC) injected liquidity into the financial system and reduced interest rates on short-term funds, a move that effectively made it cheaper for traders to build leverage and buy bonds. The central bank’s deputy governor also signalled further cuts to the cost of its medium-term loans to lenders.
“It’s clear that the bond market expects further easing, ” said Arjun Vij, a portfolio manager at JPMorgan Asset Management. He is long on government and policy bank bonds, and expects yields to drop 10 to 15 basis points from current levels.
“Virus-related developments have precipitated a negative growth shock during what would otherwise be a consumption-heavy period.
”A revival in foreigners’ demand for Chinese debt is good news for Beijing, which witnessed sub-0.5% growth in overseas funds’ holdings of onshore bonds the past two months despite its efforts to open up domestic markets. Global index compilers’ inclusions of Chinese notes into their gauges, and a steadier yuan – thanks to the US-China trade war truce – are also boosting investor confidence in the securities.
The yield on China’s 10-year sovereign notes plunged to 2.79% earlier this week, the lowest since November 2016, before paring some of the declines. The cost fell 1 basis point to 2.83% as of 5 pm in Shanghai yesterday.
The rally comes after the virus shut down the majority of China’s economy even after a prolonged Lunar New Year holiday. That has prompted investment banks to cut their forecasts on the nation’s growth.
The virus’ “hit to growth in the short-term will be harder and faster”, given China’s significant dependence on the service sector nowadays, said Wilfred Wee, a portfolio manager at Investec Asset Management in Singapore. — Bloomberg
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