Although global sovereign bonds have been witnessing a sell-off, Chinese government bonds have been relatively stable. This is partly due to China’s economic recovery and partly due to persistent inflows into its sovereign bonds. The recent bout of volatility demonstrates the diversification benefits that Chinese government bonds may bring to global bond portfolios given their low correlation with other major bond markets.
Sovereign bond markets across the world have been witnessing a sell-off year to date (causing equity markets to wobble) driven by a sharp rise in US yields. Chinese government bonds, however, have barely budged, which we believe is primarily due to the divergence in China’s economic recovery compared with other emerging market or developed market (DM) economies. To some extent, this resilience can also be attributed to the persistent inflows into Chinese sovereign bonds that we have been witnessing for some time from foreign investors.
In Figure 1 we compare China’s 10-year government bond yields versus that of major DM economies both in 2020 and year-to-date 2021. The comparison shows that China’s bond yield changes are quite similar to that of Japan, where the 10-year rate is anchored by the Bank of Japan’s targeted policies to control the yield curve.
Of course, Figure 1 does not show the fluctuations that Chinese sovereigns underwent through the course of 2020. At the beginning of 2020, Chinese government bond yields fell by about 65 basis points (bp) as the economy shut down to contain the COVID-19 pandemic. But yields recovered quickly to where they started the year as the economy re-opened. In contrast, US government bonds yields fell more sharply (by about 140 bp) but only recovered by around 30% by the year-end.
First, the People’s Bank of China, China’s central bank, did not cut rates as aggressively as the US Federal Reserve, which resulted in a lower fall in yields. Second, since China was able to contain the virus and re-open its economy more efficiently, the country’s government bond yields were able to normalize more quickly.
Sovereign bond yields in other major DM economies also fell the same way as those in China (except in Japan where yield movements were more muted), but similar to the United States (US), they failed to recover back to the levels observed at the start of the year.
So far this year we have seen US government bond yields rise by over 60 bp, pulling other bond markets along, while Chinese bond yields have been quite modest by comparison. Is the rise in DM bond yields due to inflation worries? That is a reason worth considering, but it should be noted that aside from China, Australia and Japan, none of the other major DM 10-year government bond yields have reached levels seen in early 2020.
This suggests that what we are witnessing now is more likely a normalization of DM economies that were disrupted by the COVID-19 pandemic. Markets, however, are expected to continue to test global central banks’ resolve to keep interest rates low.
The decoupling in yield movements between China and DM economies during the COVID-19 pandemic demonstrates the diversification benefits that Chinese bonds could bring to a global bond portfolio.1 Chinese government bonds also continue to provide an attractive yield pickup versus other DM bonds.
At its widest level over the past 15 months, Chinese 10-year government bonds provided a yield pickup of about 250 bp over 10-year US Treasuries. The yield pickup currently is around 170 bp, which is much higher compared with that of Japanese or European bonds.
As we highlighted in our 2021 Global Market Outlook, we think China is a market that investors should consider seriously. We believe Chinese bonds should be assessed as part of asset allocation decisions given their combination of attractive yields and the diversification benefits that they bring to global bond portfolios.
1For more details, please see: Barlow, M., & Shu, Y. (2020, July). Chinese Bonds: The Case for an Increased Allocation. State Street Global Advisors.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of the Investment Strategy & Research team through 10 March 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.
State Street Global Advisors Worldwide Entities
© 2021 State Street Corporation – All rights reserved.
Tracking Code: 3486097.1.1.GBL.RTL
Expiration Date: 03.31.2022
Information Classification: General Access