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China Bonds Still Offer Real Yield Premium


Chinese yields offer a decent pickup when compared to the likes of U.S. Tsys. This is despite yields on Chinese 10-Year government bonds falling by 50bp in '21 alone, briefly looking below 2.80% earlier this week, in what was the first foray below that level in 12 months.

  • U.S. real yields have moved into deeply negative territory, printing all-time lows in the process. This has resulted in investors chasing positive real yields, and often turning to the EM space.
Fig.1: China/U.S. 10-Year Real Yield Comparison (US = blue, China = white)

Source: MNI/Bloomberg

Fig.2: China/U.S. 10-Year Yield Spread

Source: MNI/Bloomberg

  • In China the recent headline RRR cut and additional, albeit modest, OMO liquidity injections from the PBOC in response to some signs of systemic market risks and worry surrounding economic growth have re-introduced the lower-for-longer rates narrative.
  • This has promoted a degree of resilience within the Chinese government bond space, even as other Chinese assets classes have struggled in recent times. Expectations surrounding further stimulus, a lack of correlation with other bond markets and the offshore capital inflow dynamic have also provided a helping hand.
  • The rolling 30-day correlation of the Bloomberg-Barclays Chinese government bond index to its U.S. equivalent is low in both relative and historical terms.

Fig. 2: Rolling 30-Day Correlation Between The Bloomberg-Barclays Chinese Government Bond Index & The Bloomberg-Barclays U.S. Government Bond Index

Source: MNI - Market News/Bloomberg

MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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