As the best-performing major government bond market by some margin in 2022 to date, in both local currency and US dollar terms, China continues to offer investors appealing diversification benefits.
This is despite the disappearing yield gap, given that China’s yields remain range bound while developed market yields have risen sharply elsewhere.
According to Fidelity, this hasn’t had any negative impact on the compelling nature of China government bonds (CGBs) for global portfolios.
“China government bonds have continued to offer attractive diversification benefits even as their weighting in global bond indices has increased,” believes the global asset manager.
Supportive sentiment
In general, Fidelity sees the policy dynamics in China as being supportive for the near-term outlook of the asset class.
As a result, from an asset allocation perspective, the firm is turning more optimistic on high quality duration overall.
In particular, the correlation among returns from major developed bond markets is much higher than that between CGBs and developed markets.
Fidelity can see this from correlation analysis of 10-year bond weekly returns over the last 10 and two years.
Meanwhile, analysis by the firm’s quant team shows that country-specific factors have been the main drivers of returns for both US and Chinese government bonds.
The performance of the team’s China rates model, which is designed to recommend overweight or underweight positions in the country’s 10-year government bonds, is improved by using more ’local’ indicators such as China bond momentum versus global bond momentum, or local liquidity indicators.
“This should reassure investors who had worried that a higher share of international investors into the CGB market, driven by factors such as China’s financial liberalisation and greater inclusion of CGBs into global bond indices, would result in a higher correlation between developed market and Chinese government bonds,” said Fidelity.
Further, when considering the diverging outlooks for inflation and monetary policy in China compared with developed markets, CGBs continue to look attractive for international investors, added the fund house.
