Chinese Treasuries are in a “sweet spot” after last year’s sell-off – and now offer higher yields and much lower volatility compared to US Treasuries, a portfolio manager said.
The yield on China’s 10-year government bond rose nearly 1 percentage point last year to a high of around 3.4% in November as the country was “way ahead” in getting the Covid-19 outbreak under control, said Wilfred Wee, portfolio manager at asset management firm Ninety One on Friday.
The yield on 10-year Chinese government bonds has settled at 3.2% to 3.3% in the past few weeks. In contrast, the yield on 10-year US Treasuries ranged from 1.65% to 1.75% despite the recent surge.
“I think China Fixed Income is in a (a) sweet spot for this part of the cycle,” Wee told CNBC’s Street Signs Asia.
China is clearly … way ahead in terms of treating Covid and is now facing some structural issues like debt overhang, trying to revitalize consumption, etc.
Wilfred Wee
Portfolio manager, ninety-one
“The Chinese bond market sold out last year and that was due to a better economy that came first during the crisis … I think China is clearly, and is, clearly ahead of the game when it comes to dealing with Covid. ” Now we are dealing with some structural problems like debt overhang, trying to stimulate consumption, etc., “he said.
China was the first country to report the coronavirus outbreak and the only major economy to grow over the past year when it expanded 2.3% year over year. According to estimates by the Bureau of Economic Analysis, the US economy contracted 3.5% in 2020 compared to the previous year.
The prospect of better growth rates – and a pick-up in inflation – has led to higher US Treasury bond yields in recent weeks, narrowing the gap to their Chinese counterparts.
China’s “cleverness”
Still, China’s fiscal and monetary “caution” adds to the attractiveness of government bonds, said Daryl Ho, an investment strategist from Singapore Bank DBS.
“China set an example of fiscal caution by being one of the first economies to hold back further lost spending and launch debt relief efforts to curb systemic debt accumulation,” Ho said in a statement Thursday.
“This position is expected to continue through 2021, when the economy continues to recover, in stark contrast to countries that continue to spend wastefully due to poorer virus management results,” he added.
On the money front, Chinese policymakers have started tightening policies – “against the grain of restrained policies around the world,” said Ho.
With both fiscal and monetary policy in the US still loose, the Chinese yuan could appreciate, the strategist said. This would help investors protect the higher yields on Chinese bonds from currency fluctuations, added Ho.
