China’s slowing economy might suppress global bond yields even as the US Federal Reserve considers a rate increase, threatening returns for investors who rely on higher coupon payments, according to JPMorgan Chase & Co and Nomura Holdings Inc.
Average yields on bonds globally have dropped 8 basis points this quarter to 1.64 percent, according to a Bank of America Merrill Lynch index.
The decline comes after China’s factory output slid to a three-year low and exports slumped. The IMF said earlier this month that the global expansion outlook is worse than it anticipated, after China’s US$5 trillion equity rout and currency devaluation sparked turmoil in global markets.
“As China’s growth slows, returns on both global equity and fixed income might come down in the next few years because China accounts for a significant portion of global growth,” said Ben Sy, the Hong Kong-based head of Asia fixed income, currencies and commodities at JPMorgan’s private banking unit.
“We will be facing a new normal of lower returns,” he said.
As Chinese Premier Li Keqiang (李克強) likens managing the weakest growth since 1990 in the world’s second-biggest economy to a “Chinese chess game,” analysts have cut their forecast for global expansion to 3.1 percent for this year from 3.4 percent last year. Commodity prices have slumped to the lowest in 14 years, adding to a surge in corporate defaults to at least 65 after 60 for the whole of last year, according to Standard & Poor’s.
“Since China is such a big part of global GDP growth, slowing China will likely suppress both equity and fixed income yields,” Nomura credit analyst Gaurav Singhal said.
As the Fed meets this week to consider raising interest rates from near zero, it faces other central banks that have recently declined to do so.
Last week, the Bank of England decided to keep rates on hold, saying slower growth in Chinese demand, weak commodity prices and prospect of Fed tightening were likely to have an adverse effect on a number of emerging markets.
The European Central Bank unveiled a revamp of quantitative easing recently, citing weaker global outlook.
Fitch Ratings Ltd expects China’s trend growth rate to decline further as the country adjusts and rebalances.
One scenario of gradual rebalancing could see the growth rate decline gradually to about 5 percent on average from next year to 2020.
“Slower China growth means low growth globally,” Banco Bilbao Vizcaya Argentaria SA chief Asian economist Xia Le said.
“Combined with low real interest rate and low inflation, global bond yields will likely remain low,” Le said.
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