Posted inFixed Income

China bonds have diversification benefits

Western Asset identifies three markets with attractive bond investment opportunities in Asia.
Desmond Soon, Western Asset

Investors should look at onshore Chinese governments bonds in relation to developed market bonds, Desmond Soon, head of investment management of Asia (ex-Japan) at Western Asset (owned by Franklin Templeton) told a webinar this week. 

Chinese bonds continue to have yield enhancing properties. The yield on the 10-year benchmark is 2.8% “which is way above the developed markets in Europe and Japan especially,” he said.

“Chinese bonds will continue to beat these markets in terms of their nominal yields. Importantly, the Peoples Bank of China is pursuing an easing policy, and that should continue the negative correlation between Chinese bonds and comparable developed market bonds,” Soon said.

Hence, it would be a useful diversification tool for investors to allocate to Chinese bonds, he said.

There is also technical support for Chinese bonds, Soon added, as the FTSE Russell, a vendor for the government bond index, has started to include Chinese government bonds into their widely followed the world government bond index (WGBI).

In fact, all three major index providers have bond indices have included Chinese government bonds as well as Chinese policy bank bonds into their indices. Close to $200bn in passive flows is expected to be seen thanks to the index inclusion, according to Western Asset.

India and Indonesia

“There are two other markets where we see yield enhancing and diversification benefits for global bond investors: India and Indonesia, whose currencies are cushioned by foreign exchange inflows,” according to Soon.

Sizable foreign portfolio and direct investment inflows into India mean that the country’s foreign exchange reserves have grown significantly over the years, which is quite different from the trajectory of many other emerging markets. Indian bonds, which yield about 6.8% on the 10-year mark, and 6.15% on the 5-year mark, represent good investments for fixed income investors. 

The other market that Western Asset likes is Indonesia, which has also received strong foreign direct investment flows and has emerged as an important manufacturing hub because of its large domestic market, Soon said.

“We also think that the country’s consumer price inflation is fairly benign. Indonesia is a major commodity and food producer, which reduces pressure on inflation. [As a result], we’re seeing that foreigners continue to like Indonesian bonds which currently are attractive at about 6.5% on the 10-year mark,” he explained.

Part of the Mark Allen Group.