Growing fears of a global recession are set to boost the attractions of the relatively high yields on offer now for Chinese government bonds.
Those bonds' phased inclusion since April in the Bloomberg Barclays Global Aggregate Bond index has been boosting inflows this year, but now their potential charms in a softening global economy — including positive real and nominal returns, considerable liquidity and solid investment-grade ratings — could fuel further momentum, analysts said.
A global economic downturn over the coming 12 to 18 months would "accelerate the attractiveness" of Chinese government bonds, said Harvey Bradley, a London-based portfolio manager with Insight Investment Management Ltd.
For now, while Insight's base-case for the global economy calls for below-trend growth rather than a recession, the firm is tweaking its allocations to take advantage of a relatively steep yield curve for Chinese government bonds, extending the duration of its holdings to seven years and more from two-year to five-year paper earlier in the year, said Mr. Bradley.
The latest statistics from China Central Depository and Clearing Co. Ltd. show allocations by overseas institutional investors to all Chinese bonds reaching a record 2.02 trillion yuan ($282 billion) as of July 31, up 3.2% from the previous month and up 25% from the year before. Over the four months since Chinese bonds began entering the Bloomberg Barclays Global Agg at a clip of roughly 30 basis points of that index per month, the value of foreign investors' holdings of Chinese bonds jumped by 14%, double the 7% gain for the prior four months through March 31.
Meanwhile, the number of investors registered with China's 2-year-old Bond Connect program, which allows investors based in Hong Kong to freely trade mainland bonds, stood at 1,134 as of July 31, up from 1,038 a month before and 391 a year earlier.
Those numbers suggest the "mainstreaming" of Chinese bonds for institutional investors globally is well advanced and transitioning now to a "value proposition" phase, said Wilfred Wee, Singapore-based portfolio manager of Investec Asset Management's $54 million All China Bond strategy.
The relatively high, positive yields Chinese bonds offer now are "certainly a charm," while the low correlation with U.S. Treasuries, the other huge market now sporting positive yields, is a further reason to be "looking at a China bond allocation now," Mr. Wee said.
Mr. Bradley said Insight Investments has overweighted its exposure to Chinese bonds this year for accounts where it had leeway to do so.