China’s sovereign bonds slid from the top of global performance rankings to near the bottom in recent weeks, undermining their status as an alternative haven just as global markets were roiled by the war in Ukraine.
The return on yuan debt, excluding currency fluctuations, slipped to 30th among 46 sovereign markets tracked by Bloomberg since Russia invaded Ukraine on Feb. 24, according to data compiled by Bloomberg. The securities had topped the rankings in January when they were touted as a haven due to China’s monetary policy divergence with the Federal Reserve.
There are growing signs that investors are unwinding bets, with global funds selling a net 35 billion yuan ($5.5 billion) of Chinese government debt last month, a record reduction. Pacific Investment Management Co. cut its call as yield differentials with Treasuries narrowed, while AllianceBernstein Holding LP warned that Beijing is going to drive growth by issuing more debt.
Worst Performers
China’s bonds have been flat since Russia’s invasion of Ukraine
Source: Bloomberg
NOTE: Return figures exclude currency fluctuations
“China rates have failed to follow the decline in U.S. Treasuries amid global risk-off trades,” Becky Liu, head of China macro strategy at Standard Chartered Bank Plc, wrote in a note. China’s stronger-than-expected GDP target for this year “suggests that credit policies may turn more proactive in the near term,” she wrote, adding that the 10-year yield may rise to 2.95% by the third quarter.
The benchmark 10-year yield has risen 15 basis points from a 20-month low hit in January to 2.83%, while Treasuries of the same tenor hover near the lowest since early 2022. China on Saturday announced an economic growth target of about 5.5% for 2022, at the higher end of many economists’ estimates, while also outlining higher fiscal spending to stimulate the economy.
At the same time, there’s a growing chorus of investors who see less room for monetary policy loosening by the central bank after it had cut a key lending rate and boosted liquidity. Traders had bid up Chinese bonds from last October as it had pivoted toward easing.
“We see more risks than opportunities for reward” in bonds, China Asset Management wrote in a note. The fund sees no rate cuts or reserve requirement ratio reduction from the People’s Bank of China in the near term and expects the 10-year yield rising to as high as 3% on growing credit supply, according to the note.
The selling by foreign investors last month was the first since March 2021, according to data compiled by Bloomberg. Domestic funds, brokerages and commercial banks also reduced their holdings of the Chinese debt during this period, the data show. There was also speculation that some of the selling may have come from Russia as sanctions from the U.S. and European Union cut off the Russian central bank’s access to much of its foreign reserves.
READ: China Sees Record Bond-Market Retreat by Foreign Investors
Goldman Sachs Group Inc. lowered its assessment on Chinese government bonds Monday on expectations they may come under pressure if funds have to make up for their inability to access Russian investments by selling other emerging market assets. Developing market investors added a net $1.7 million of China bonds last week, compared with $16.2 million Indonesian bonds and $13.7 million Philippine debt, according to exchange-traded funds flow data compiled by Bloomberg.