Contrarian Bears Who Got China Bonds Right Say Worst Is Over
Contrarian forecasters who correctly predicted the recent plunge in Chinese bonds say the sell-off is over, for now.
A window of opportunity for buying China’s sovereign notes is opening, as the debt is now looking cheap, according to BNP Paribas SA and China Everbright Bank Co., two of the few firms that called the bonds’ slide earlier this year. The government notes are headed for their worst monthly drop in more than eight years as bets on monetary easing recede and the economy shows signs of recovery.
"The correction is more or less done in the near term," said Ji Tianhe, a strategist at BNP Paribas, adding the sell-off was surprisingly drastic. "For investors actively trading in this market, the best strategy would be to buy on dips and sell on rallies, and for those who would like to buy and hold, now is a better time to add positions.”
The sudden tumble in Chinese bonds comes as some of the onshore debt was included in a major global index from this month -- viewed as a seal of approval for China’s efforts to modernize its bond market and make it easier for foreign investors to participate.
It also caught many China watchers off-guard -- two-thirds of analysts and traders surveyed by Bloomberg last month expected the bull run to continue this quarter. China’s sovereign bonds were last year among the best performers in the world, but the course has reversed as investors took central bank’s recent moves and authorities’ remarks as signs the government is moving away from monetary easing and aggressive stimulus.
The yield on notes due in a decade has surged about 37 basis points this month, the most since October 2010. That has pushed their interest-rate premium over the costs on U.S. Treasuries to the widest in more than a year. Chinese government bonds are also now close to being the cheapest since June versus Shanghai equities, according to data compiled by Bloomberg.
There are already signs the plunge is coming to a pause, with futures contracts on China’s 10-year government bonds rebounding from a five-month low last week. The recent drop was likely overdone, according to Qin Han, an analyst at China’s second-largest brokerage Guotai Junan Securities Co. He accurately called the plunge in January, after warning last year’s rally was turning the bond market into a "bubble."
Zhou Maohua, an analyst at China Everbright Bank who also correctly predicted that bonds will lose steam at the end of March, said they will fluctuate in the second and third quarters as the central bank adjusts monetary policy.
Higher inflation may weigh on debt, according to He Qian, a fund manager at HFT Investment Management Co. But for the short term, "bond yields will swing and may drop in the coming month, bringing buying opportunities."
The yield on China’s 10-year government bonds rose 3 basis points to 3.44 percent, the highest since November.
©2019 Bloomberg L.P.