For bond investors rocked by the outsized swings in Treasuries in recent weeks, Chinese government debt must look like an oasis of stability.
On average, China’s 10-year yield has moved by less than one basis point daily since the start of the year, compared with seven basis points for its US counterpart, according to data compiled by Bloomberg. Its 30-day volatility is hovering near the lowest since 2018.
China’s normally-placid bond market has become even more tranquil of late as traders take to the sidelines seeking greater clarity on the monetary policy outlook. The relative calm is a double-edged sword: it boosts the notes’ appeal as a diversification play but also suppresses yields at low levels that may keep investors away.
A gauge of leverage in the market hit a record on Thursday, indicating local demand is picking up. China watchers are waiting for official figures this month to see whether March’s global bond ructions enticed overseas funds to return, as suggested by data from the Institute of International Finance.
Foreign investors continued to trim their exposure to Chinese debt in the first two months of the year — partly due to relative yields — after dumping a record amount of the securities in 2022.
“Clarity in China’s economic prospects and monetary policy later this year is lacking, which created additional difficulty for bond trading,” said Qi Sheng, an analyst at Orient Securities Co. “One of the few practical strategies seems to be holding bonds for coupon return with more leverage.”
Bond investors seeking to gauge the outlook for the world’s second-largest economy have had little to go by, with recent data mixed. While an official gauge for the non-manufacturing sector jumped to the highest level since 2011 in March, a private survey showed the nation’s manufacturing activity unexpectedly eased.
Even the authorities’ move to lower the reserve requirement ratio for banks last month failed to rouse the market. The 10-year government bond yield has lingered near 2.86% since the cut was announced on March 17.
And bond bulls are getting few signals that even stronger monetary policy help is on the way.
China’s real interest rate level is “appropriate,” central bank chief Yi Gang said in early March, before he was reappointed as governor. Lowering the RRR to provide long-term liquidity will remain an effective way to support the domestic economy, he added.
Still, foreign investors need to look past the near-term uncertainty, according to Jean Charles Sambor, head of emerging markets fixed income at BNP Paribas Asset Management.
“Given that China is at the junction of emerging and developed markets, it is seen as a disruptor in asset allocation, both in equities and fixed income,” he said. Despite some short-term reduction in foreign ownership, “it will continue to increase over time and should be part of any portfolio allocation decision”.
Here are the key Asian economic data due this week:
- Monday, April 10: Japan BoP current account balance.
- Tuesday, April 11: Australia consumer and business confidence; China CPI and PPI; Bank of Korea policy decision; Philippines trade balance; Malaysia industrial production.
- Wednesday, April 12: RBA’s Bullock speaks; New Zealand retail card spending; Japan PPI and core machine orders; India CPI and industrial production.
- Thursday, April 13: Australia employment and consumer inflation expectations; China trade balance.
- Friday, April 14: New Zealand manufacturing PMI; India trade balance; Singapore MAS policy decision.