China Bonds: Beyond Tariffs and Trade

Mid Week Bond Update

China Bonds: Beyond Tariffs and Trade

China's bond markets are gaining new prominence with the imminent addition of key sectors to major global indexes, regardless of the outcome of trade negotiations.


China’s burgeoning fixed income market is commanding greater attention with its bonds on the verge of inclusion in major fixed income indexes, including the Bloomberg Barclays Global Aggregate – used to track assets under management of about $2.5 trillion worldwide.

This shift is a positive for a world eager to find fresh sources of return as well as the the opporunity for China to borrow on the global stage. The range of fixed income available includes sovereign debt (China Government Bonds, or CGBs), corporate bonds, CDs and bonds issued by banks -- as well as specialized issuance such as Policy Bank bonds (i.e. raising funds via government-linked banks for projects and priorities authorized by the central government, including agriculture and infrastructure.

In the corporate sector, credit quality remains an important concern and differentiator, thanks in part to  bankruptcies suchShantong SNTON Group Co., Shandong Jinmao Textile Chemicals Group Co. and Shandong Dahai Group Co.s. Regional, state and local governments also face their own varied challenges, with the added variable of the central government actions to regulate and rescue entities as needed.

 

Chart: Breakdown of China's Onshore Bond Market by Category

Chart courtesy of Brandywine Global. Sources: CEIC, Morgan Stanley Research.  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

On the rise: Odds of a second Fed rate cut   

The futures market is now pricing the probability of a single rate reduction by the Fed at about 40%.  That’s not a surprise, given the tremors over trade and the return of the inverted yield curve between the three-month and 10-year maturities.

But what’s new is that the odds of a second cut have risen, too, also to about 40%, reflecting in part increased focus on the potential for recession. On the other side of the coin is continued strength of baseline economic data from the U.S., despite the continued uncertainties of the negotiations between it and China, the UK and the European Union.

 

On the slide: Bunds below zero

Yields for Germany’s 10-year Bund headed downward from zero, reaching as low as -0.162% on May 28; the 5-year yield reached -0.553%.

Some observers suggest the yields reflect a renewed flight to safety among buyers of Europe’s sovereign debt in the wake of the recent EU elections, in which nationalist and environmental/green) parties showed gains – but not a strong enough showing to threaten the existing party hierarchies in Germany.

 


All data Source: Bloomberg as of May 28, 2019 unless otherwise specified.
 

Definitions:

Bunds” refers to bonds issued by Germany's federal government. Bunds are available in 10- and 30-year maturities.

The Bloomberg Barclays Global Aggregate Bond Index is an unmanaged index of global investment-grade fixed-income securities.

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