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April 6, 2021

Seeking yield? Go east

Our data on Chinese bonds show how they may offer the best value for money
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In-house blogger
Guest blogger
Laraine Yuan
International Account Manager - APAC
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

Investors betting on a strong post-pandemic recovery have driven 10-year US Treasury yields to their highest level in 14 months. But even at above 1.7%, real yields– the nominal yield of a bond minus the rate of inflation – are expected to remain below zero, particularly with inflation on track to breach the Federal Reserve’s 2% target.

Compare that to Chinese Treasuries of the same duration, which are yielding more than 3.2%.

Unsurprisingly, this has made Chinese bonds more attractive for global investors. Foreign holdings of Chinese fixed income securities have nearly doubled to more than 2 trillion yuan (USD319 billion) since their phased inclusion in major global indices from April 2019.

Even so, investors may not consider yields of 3% a rewarding trade-off if they have to wait 10 years to cash in. Luckily, Chinese bonds demand less patience.

As this chart shows, the yields on 10-year China Treasuries starts to plateau after three years anyway – unlike that of US securities, which climbs more sharply with every passing year.

For investors seeking yield without the time commitment, short-duration Chinese bonds may be the best bet.

This is even more true for Chinese corporate bonds, most of which mature in less than five years.

For more evidence that short-term Chinese bonds may offer better value, compare the performance of three-year US and China corporate and government debt in our final chart.

Yields on Chinese bonds started climbing in April 2020 thanks to the country’s rapid recovery from the virus lockdowns, which enabled its economy to rebound more quickly and allowed the People’s Bank of China to hold back further stimulus. They have since managed to keep those gains.

US bonds, by contrast, suffered a dramatic sell-off at the start of the COVID-19 outbreak before rebounding strongly on the back of unprecedented monetary easing by policymakers.

Short-term investment-grade yields spiked as investors cashed in their most liquid bonds to steel themselves against market uncertainty – but quickly fell again following a wave of new issuance fuelled by Fed’s corporate bond-buying spree to maintain market stability. US yields have remained low since.

But now, with vaccinations accelerating and the US job market roaring back to life, how much longer will this trade continue to make sense?

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