NEW YORK, March 3 (Xinhua) -- Chinese bond yield would move up again after recent drop amid coronavirus concerns and overseas investors are expected to buy more Chinese bonds to earn higher returns from wide yield spread between Chinese bonds and that in developed markets, according to multiple research institutions.
China has seen the yield of its 10-year government bond falling to less than 2.28 percent by Tuesday from that close to 3.19 percent in the beginning of 2020 as yield of global bonds posted steep decline in the period.
YIELD SPREAD WIDENS
Growth uncertainty arising from the spread of COVID-19 outside China recently caused investors flock to the largest and most liquid bond markets of the developed economies namely the U.S. Treasuries, German Bunds and Japan Government Bonds, according to macroeconomic research body MRB Partners.
Rampant risk aversion in the market drove down the yield of U.S. 10-year Treasury bond to less than one percent on Tuesday in comparison with that over 1.8 percent at the beginning of 2020.
Meanwhile, the yield of Germany 10-year government bond fell further into the negative territory and stayed below negative 0.6 percent, down from around negative 0.2 percent early this year.
The yield spread between China 10-year government bond and U.S. 10-year Treasury bond rose to 178 basis points as of Tuesday up from around 42 basis points a year ago, according to data with Investing.com.
Investors' risk appetite will be rekindled and they will again seek higher yielding bonds as investors recalibrate their assessment of growth prospects in 2020, said MRB Partners.
"In our view, they will conclude that while the immediate impact on Q1 and possibly Q2 is negative, there is no risk of global recession in 2020," said MRB Partners citing positive developments in fighting against the novel coronavirus in China.
Low yields and interest rates, as well as dovish central banks in developed economies will "push" investors into seeking better portfolio returns, noted MRB Partners.
The research team with MRB Partners told Xinhua that the beneficiaries of this rotation will be high-yield segments in developed markets as well as emerging market bonds in general, in particular with the highest yielders.
"We do think China bonds appear attractive to foreign investors given the yield pickup China offers versus developed market sovereigns," said Lucy Qiu, emerging markets strategist at UBS Global Wealth Management in a recent interview with Xinhua.
The yield of China's 10-year government bonds would trade between 2.8 percent to 3 percent during the first quarter of 2020 and increase to 3.3 percent by the end of 2020, Qiu said.
"We expect Chinese bond yields to recover from their current low levels during the course of 2020. While we do not make point forecasts, an end-2020 yield of 3.5 percent would be consistent with our growth expectations," said MRB Partners.
MORE INFLOWS EXPECTED
As J.P. Morgan started to implement its inclusion of Chinese bonds into its Government Bond Index-Emerging Markets (GBI-EM) indices on Feb. 28 following the steps of Bloomberg Barclays Global Aggregate Indices, hundreds of billion U.S. dollars would flow into Chinese bond market in the coming few years, according to analysts.
Within 2020, "we expect around 100 billion U.S. dollars of inflows into Chinese bond market from passive inflows, active inflows (search for yield) as well as allocation shifts from reserve managers aiming to diversify away from USD assets," said Qiu.
The inclusions of China's equities and bonds into major international investment indices like MSCI equity indices and Bloomberg Barclays Global Aggregate Index could result in sizable additional inflows of around 450 billion U.S. dollars over the next two to three years, according to staff estimates by the International Monetary Fund (IMF) in August 2019.
"If China continues its incremental capital market opening and makes its currency regime more transparent, the estimate (by the IMF) errs on the low side," said MRB Partners.
Though offshore investors' interests in purchasing China government bonds and policy bank bonds has slowed down since December, 2019, "we believe the momentum would be restored soon as the inclusion in JP Morgan GBI-EM index is about to commence," said Janice Xue, an analyst of financial institution and foreign exchange strategy with Bank of America Global Research recently.
On the other hand, offshore investors increased their holdings of medium-term notes by 12 billion yuan in January, showing growing interests in China's credit bonds, noted Xue.
"We remain constructive on 10-year China government bonds on the back of extended monetary easing cycle, uncertainties about the pace of growth recovery, and darkened external outlooks as COVID-19 is spreading quickly in some other countries."
The share of China's bond owned by overseas investors would continue to grow because the rest of the world, including central banks, as well as active and passive investors, remains structurally "underweight" RMB assets, said MRB Partners.
Only around five percent of China's bonds are owned by overseas investors in comparison with around one third of foreign ownership in bonds of other emerging markets, according to MRB Partners. (Contributed by Liu Yanan, edited by Niu Huizhe, niuhuizhe@xinhua.org)
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