Goldman Sachs: CGBs: Less Outperformance, More Diversification

Goldman Sachs note that “the outperformance relative to peers of CNY rates and the Yuan over the past year could imply lower expected returns from here for USD-unhedged CGBs, but in our view the case for including CGBs into global fixed income portfolios remains strong.”

• “Carry-to-vol of USD-unhedged CGBs remains elevated relative to other global fixed income assets, and the weak correlations of CGB returns with key global market risk factors mean that their contribution to expected returns-to-vol of global fixed income portfolios can be sizable (thanks to carry and diversification effects).”
• “The bullish price action of CNY rates around negative domestic growth shocks in China over the past year, and the resilience of foreign inflows during the same periods, also show that CNY rates can offer an effective hedge against any further China idiosyncratic growth disappointment in the months ahead, even as sequential growth has likely already bottomed.”