A RELENTLESS rally in Chinese bonds has at least one global investor taking pause as yields continue to plumb record lows.
JPMorgan Asset Management is taking a break from pursuing gains in China’s government debt with the benchmark 10-year yield trading just above 2.1 per cent. It’s concerned that the yield gap between short and long-term bonds will narrow to levels that will cause policymakers to intervene, according to Andrea Yang, the firm’s China macro strategist for global fixed income, currency and commodities.
“We see an increasing probability of intervention by the People’s Bank of China (PBOC),” she said in an interview last week. “Therefore, we will not chase at that level but will maintain our current positioning.”
Yuan bonds are extending a record rally after officials slashed a string of interest rates and vowed to further support growth in recent weeks. China’s government on Saturday (Aug 3) laid out its priorities to spur consumer spending as weak domestic demand continues to weigh on growth.
Traders have been fixating on the shape of the yield curve for clues on whether the PBOC will borrow and sell bonds to prevent the advance from turning into a bubble that threatens financial stability. The central bank is walking a tightrope between supporting growth and avoiding financial shocks to the economy if the rally reversed in a disorderly manner.
The gap between two and 10-year bonds narrowed to around 60 basis points on Monday, from around 70 basis points in late July. The difference was around 40 basis points in April when Beijing began to weigh a bond trading strategy amid a ramp up of warnings about a bubble forming.
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JPMorgan Asset Management plans to maintain its exposure mainly in the 10-year notes unless it sees massive stimulus, “which is unlikely”, according to Yang.
The gap between two and 10-year yields will narrow again, if the former gets anchored by the policy rate while the latter falls below 2.1 per cent, she added. Near-term resistance levels will be 2.1 per cent and 2.3 per cent for the 10 and 30-year bonds respectively, Yang said.
International investors account for just 7 per cent of holdings in Chinese government bonds, with the lion’s share held onshore, according to central bank data from May.
“Onshore investors tend to favor long duration, so that’s why PBOC is still being cautious,” Yang said. “Meanwhile, we also find a lot of opportunities in the emerging-market space, especially India.” BLOOMBERG
