Keep Paying Attention to China's Bonds, Aberdeen Standard Says

(Bloomberg) -- China’s bond market may have fallen out of the spotlight this month as equities surged, but investors should continue to pay attention to it, according to Aberdeen Standard Investments.

The Edinburgh-based investment company expects a rebound for bonds after gains for domestic stocks drew focus away from the asset class, said Edmund Goh, portfolio manager for Asia fixed income at Aberdeen.

“This year there are still opportunities in the bond market, it’s not a forgone year like 2017,” he said in a telephone interview.

Aberdeen Standard reduced risk in its fixed-income portfolios prior to April on the back of “really strong A-share momentum,” Goh said, referring to Chinese domestic equities. The idea was “that would drain some money and take attention of the market away from bonds,” he said.

The CSI 300 Index is up 3 percent so far this month. During the same period, Chinese bond markets have sold off as Bloomberg Barclays began adding fixed-income securities issued by the government and its policy banks to the Global Aggregate Bond Index. Bloomberg Barclays, like Bloomberg News, is owned by Bloomberg LP.

The yield on 10-year Chinese government bonds has risen about 29 basis points since the start of April to 3.36 percent as of Friday, surrendering gains for the securities year-to-date.

Goh said he doesn’t expect the selloff to last.

“The market was stocking up a bit before the index inclusion coming into April, and flows disappointed a bit,” he said. “A lot of flows people were expecting for day one will come later,” he added, saying the current weighting in the Global Aggregate Index of around 0.3 percent will not yet be the source of much tracking error for portfolio managers. “They can afford to wait,” he said.

Prior to the launch, global investors cited a number of reasons why they expected a slow start.

That said, Goh sees evidence that global investors are already moving in -- just not to the largest part of the market. He said there’s increased liquidity in Chinese policy bank bonds, where bid-ask spreads have tightened during the past few months. Many investors in China prefer to buy-and-hold bonds rather than actively trade them.

However, the same boost to liquidity has not been true for Chinese government bonds. “For CGBs, the bid-ask has widened quite a bit since April,” he said.

To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Andreea Papuc

©2019 Bloomberg L.P.