BTPs, government bonds and Chinese bonds now yield 3 per cent. But who buys them?

Hang Seng lost 15.25% year to date, Shanghai 16.4%. The shutdowns continue in the big cities for the sixth week in a row, it is understandable that Chinese investors, who have invested heavily in the stock market in recent years, have changed their approach. In fact, household liquidity is moving into bonds, deposits and money market products, according to consulting firm Z-Ben Advisors.

Money is flowing so fast into some warehouses that managers have begun to limit flows to maintain a size limit. In fact, the ten-year Chinese bond yield yields 2.8% today, down 0.36% from the beginning of the year in the presence of prime yields of 3.7%. On the other hand, the BTP of the same length today with a price of -0.5% gives 3.12% (this morning the Italian government opened at 3.16%), which corresponds to a spread on the German bottom of 201 basis points. The US T-bond, on the other hand, yields a return of almost 3.05% after interest rates were raised last week in the range of 0.75-1%.

New capital raising fell 83% in China in January-April from the previous year to 154.6 billion yuan ($ 23 billion). The risk appetite has disappeared in recent months after the outbreak of war in Ukraine, the general lockdowns in China and the flare-up of inflation. Z-Ben’s data indicate an increase in bond fundraising over the past two months to a total of 127 billion yuan (about $ 19 billion), or 27% higher than the previous year’s levels.

Michele Morra, Moneyfarm portfolio manager, confirms one that Western investors’ exposure to Chinese bonds “has grown significantly in recent years, also thanks to the inclusion of China in the most widely used bond indices such as the Bloomberg Barclays Global Aggregate”. Two of the benefits of this asset class (so far) have been, firstly, “the higher coupon component”, adds Morra, “secondly the diversification that this asset brings to the portfolios”. Historically, Chinese government interest rates have actually “shown a correlation with global bonds, also thanks to the different phase of the Asian giant’s monetary and economic cycle”. In fact, bond yields have been falling over the past 12 months, which means that the price has risen thanks to strong demand, while the BTP yielded 1.19% at the beginning of the year, almost a third compared to today.

While China has confirmed unchanged interest rates at this level over the last few years, the Fed only started the bullish cycle last month with + 0.25%, to which it added 0.5% a few days ago, and in June it will adjust the cost of money by at least 0.5%. The 10-year T-bond yields more than China’s debt at this point. “In an uncertain environment like the one we live in today,” Morra resumes, “many investors are likely to want to increase the component of safe haven assets, such as the US Treasury Department, which tends to perform better in times of recession and high volatility In addition, the Treasury, which currently stands at around 3%, is generally regarded as the risk-free interest rate and affects the valuation of other asset classes, not just Chinese bonds. which the Chinese coupon component no longer seems to guarantee “, the expert emphasizes.

To this we must add that geopolitical uncertainty “does not help to channel the currents towards the eastern country, for fear of sanctions from the West. In fact, since the outbreak of the conflict in Ukraine we have witnessed a collapse of the asset under the management of one of The main Chinese government bond ETFs, which continued in recent weeks with € 2.5 billion less assets than on February 24, 2022, in parallel with a sudden increase in flows to US government bond ETFs, “warns Morra .

It is not taken for granted that a choice of this type would be the right one for European investors, Morra concludes, “if we were to witness a runaway inflation in the US, we could see a turn towards bonds issued in China if index consumer prices remain much more moderate than in the West “. Also because 40% of cities are still locked, is a somewhat effective response to the increase in the cost of living. As for BTPs, when the spread returns to 200, BofA wrote a few days ago, it usually begins to attract the final investor market, the retail trade. (All rights reserved)

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