“We remain positive on China onshore government bond performance in the medium term, thanks to dovish central banks globally and a notable yield pickup compared with developed market government bonds,” Ken Hu, chief investment officer for Asia-Pacific fixed income at Invesco, told FSA in an interview.
He highlighted the recently reformed loan prime rate published on 20 August, which showed an effective lending rate cut.
“Monetary policy is expected to remain accommodative through various money market operations. Although a benchmark rate move is less likely in the near future, loan prime rate reform is to effectively lower lending rates,” Hu said.
Meanwhile, investors’ anxieties about a possible global recession have driven long-dated bond yields lower in all major markets, including China, which now hosts the world’s third largest government bond market, worth around $13trn, according to Morgan Stanley estimates.
Last week, Bloomberg reported that the yield on 10-year China Government Bond (CGB) dipped below 3% for the first time since 2016, while the 20-year yield fell three basis points (bps) the 30-year dropped 7bps.
Nevertheless, CGB yields offer a significant premium over the rates paid by developed market bonds. The yield on the benchmark US 10-year Treasury note closed at 1.56% on Wednesday, and Germany has announced that it will issue 30-year bonds with a negative yield for the first time ever.
Hu remains optimistic about a resolution of the US-China trade dispute, although his confidence earlier this year that a speedy deal would be reached was misplaced.
Meanwhile, the dollar-denominated Asia corporate bond market will remain vulnerable to risk aversion among investors nervous about a global economic slowdown. About half of total outstanding issue volume comprises China bonds, according to data gathered by Asifma.
The $420m Invesco Asian Bond Fund, which Hu co-manages with Chris Lau and Jackson Leung, has a 58% allocation to China corporate bonds and 80% weighting to sub-investment grade credits, which are especially susceptible to selling pressure during weak economic activity.
That exposure has hurt the fund’s recent performance, which has suffered a sharp decline since July.
Hu is now looking for opportunities to increase holdings to countries which might benefit from manufacturing and technology companies relocating from China. So, perhaps this time he is hedging his optimism about a US-China trade deal.
Invesco Asian Bond Fund vs Asia Pacific fixed income sector average