Pimco Sours on Chinese Debt as Rising US Yields Erode Appeal


(Bloomberg) – Pacific Investment Management Co. lowered its recommendation on Chinese sovereign debt from neutral to overweight as policy divergence with the United States diminishes its yield advantage.

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The investment giant has been overweight equities for most of last year when inflows into domestic bonds hit an all-time high.

“We have become more neutral on China duration given the repricing of the US rates market as the Chinese market has outperformed,” said Hong Kong-based Asia portfolio manager Stephen Chang, adding that bonds are not attractive, even on a currency hedging basis. .

The yield premium on China’s 10-year government bonds over Treasuries fell to the lowest since 2019 last week as soaring US inflation prompted traders to increase bets for upsides aggressive rate hikes from the Federal Reserve. Meanwhile, China’s slowing inflation is giving its central bank more leeway to relax after injecting liquidity to support an economy battered by Covid restrictions and a property slowdown.

Global demand for Chinese debt is already down this year. Foreign institutional investors bought a net amount of 66.3 billion yuan ($10.4 billion) of Chinese securities on the interbank market last month, compared to 69.8 billion yuan of purchases in December, according to the Bloomberg calculations based on data from Chinabond and Shanghai Clearing House.

Strategists at Societe Generale SA and Barclays Plc predict further moderation in foreign buying after funds increased allocations following the inclusion of domestic debt in a global bond index in October.

sweetspot

Still, expectations of further monetary easing mean that foreign funds are not completely dumping Chinese debt. Pimco’s Chang favors seven-year government bonds and banknotes due to the flatness of the seven- to ten-year portion of the curve.

PineBridge Investments echoes his view.

“The seven-year part of the government bond curve is the sweet spot, given our view of short-term monetary policy,” said Arthur Lau, head of fixed income for Asia ex-Japan. in Hong Kong. “The short end rallied as rates fell to reflect the easing cycle in China, while the long seven-to-ten year end of the curve did not react to such a move.”

While the People’s Bank of China refrained from cutting interest rates this week, market watchers expect cuts in the coming months. This could present a medium-term buying opportunity, according to Lau who sees 10-year yields falling to 2.2%-2.5%. The benchmark was at 2.78% on Thursday.

For Western Asset Management, Chinese bonds are attractive from a diversification perspective. “They won’t repeat last year’s performance, but they will still outperform,” said Desmond Soon, portfolio manager and head of Asia ex-Japan investments at Western Asset Management in Singapore, referring to government bonds. Chinese. “It is the second largest bond market in the world with only 10% foreign ownership,” he said.

Fidelity International expects global investors to continue exploring Chinese government and political bank bonds. They provided healthy liquidity even during the peak of the pandemic in March 2020, said Vanessa Chan, director of Asia bond investments at the fund.

Other investors remain cautious. Yields on Chinese government bonds are at the lower end of their range, Brad Gibson, co-head of Asia-Pacific fixed income at AllianceBernstein, said in an interview with Bloomberg Television.

Five-year yields at 2.35% “fully price in another round of small interest rate cuts,” he said.

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