Buying Chinese bonds so last year


Thu, Feb 28, 2019 - Page 12

Piling into Chinese government bonds now looks so last year.

The rally in the debt market is faltering quickly, with Chinese sovereign bonds due in a decade headed for the biggest monthly decline since August last year.

The securities, which were buoyed by safe-haven demand and monetary easing last year, are now faced with a barrage of new threats — a stunning surge in equities, a better outlook on the economy and elevated interbank borrowing costs.

“Investors were excessively optimistic about bonds, and now the surge in stocks and improving economic indicators is a slap in the face,” Commerzbank AG senior emerging markets economist Zhou Hao (周浩) said.

The shift in sentiment has been swift — analysts not long ago were debating when the 10-year government yield would slide below a key level of 3 percent for the first time since 2016.

China watchers have recommended investors sell bonds for stocks, as the latter would benefit from better risk appetite. Equities also look cheap relative to debt after their worst plunge in a decade last year.

Here are the threats Chinese government bonds face:

Major benchmarks for Chinese stocks have entered bull markets, as a surge since Jan. 3 has added nearly US$1.4 trillion to the value of the equities, which could encourage more investors to divert funds into stocks.

The economy is showing the first signs of recovery. Coupled with better-than-expected credit data, that means China could refrain from aggressive easing.

US President Donald Trump said he was getting very close to a trade deal with China, which would further fuel risk appetite.

Borrowing costs are rising — China’s overnight repurchase rate jumped to the highest level since June on Tuesday.

Liquidity might get even tighter next month: Lenders need to set aside cash for quarter-end regulatory checks and refinance nearly 1.9 trillion yuan (US$284.38 billion) of short-term debt.