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Why China’s world-beating sovereign bond rally may have run its course

Beijing: For those touting Chinese sovereign bonds as the place to be for debt investors, China market watchers are warning that the best parts of a rally could already be over.

Chinese bonds have been gaining since October as the People’s Bank of China pivots toward easing, even as Treasuries lead a global rout with other major central banks normalizing pandemic-era policies. The easy gains are over, and traders are now watching if the supportive policies will revive the economy, analysts said.

“We see more risks than reward in China bonds” after the recent rally, said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd. The PBOC may withdraw liquidity after the Lunar New Year holidays, and the investors will be waiting on key events and data from monthly loans to the annual National People’s Congress in March for catalysts, he said.

With the Federal Reserve signaling a rate-hike cycle from March, bond investors are looking for refugee, with options dwindling as more central banks from Indonesia to South Korea also signal the need to hike. Government debt in China have been the outstanding performer this month as the PBOC cuts a key interest rate, with the benchmark yield dropping to its lowest in almost two years.

Yuan bonds posted a return of 0.8% so far this month excluding currency fluctuations, the best performance among the world’s 20 biggest sovereign markets tracked by Bloomberg.

An iShares ETF that tracks China treasury and policy bank bonds attracted a net $101 million of inflows, reversing outflows in the past three months, according to Bloomberg compiled data.

Yields on the 10-year bond have dropped almost 40 basis points from an October high to 2.67% earlier this month. They rose two basis points on Thursday.

ANZ’s Xing says the yields could climb to 2.85% by the third quarter as improving growth momentum and accelerated credit supply weigh on bonds. A Bloomberg survey of analysts sees the yield ending the year at 2.78%.

Investors should avoid buying Chinese bonds for now as they’ve gotten expensive, according to Yang Hao, an analyst at Nanjing Securities. A better entry point would be in March when the economic effect of supportive policies becomes more apparent, which may weaken the bonds, turning valuations more favorable.

March is when the NPC, China’s main legislature, sets yearly economic targets, while policymakers will release the annual government bond sale quotas too. Beijing is expected to continue prioritizing stability with a full set of fiscal, monetary and industrial policy tools, amid a growing consensus that recent rate-cut alone won’t be enough to offset woes in the property sector.

While Chinese bonds may stall or give up a bit of the rally, that’s still more favorable than expectations for Treasuries. Analysts now see U.S. 10-year yields rising to 2.15% by year end, from 1.8% on Thursday.

“From a dollar-based investor perspective, only Chinese bonds have been a winner for the best part of the last 18 months,” said Steven Major, head of fixed-income research at HSBC Holding Plc. “I think investors like to back winners, so that trends looks to continue for us.”

Also read: Why investors are fleeing China’s investment-grade property bonds

Source: The Print

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