In normal times, China's low-yielding government debt wouldn't be flashing a buy signal. These are not normal times, however.
The nation's 10-year sovereign bonds have seen yield premiums over their U.S. counterparts grow to the most in more than two years — even as the yield on the yuan notes nears its lowest since 2002. This as the cash reward for buying global bonds is at a record low, the world's pile of negative-yielding debt now exceeds $14 trillion and panic over the economic impact of the COVID-19 virus is causing volatility spikes in most equity markets.
Places like Australia could soon see sub-zero yields for the first time, while bond markets from the U.S. to Taiwan are already showing the lowest yields on record.
A coordinated crisis response from central bankers is stoking bets of more rate cuts, adding more fuel to the global bond rally. That means the likes of J.P. Morgan Chase, BNP Paribas and Aberdeen Asset Management say Chinese debt is attractive because of where yields are elsewhere.
The biggest bond rally since 2015 in China reversed some to start this week as the country's stock market roared back to life. But after falling as much as 0.28% Tuesday morning, China's 10-year government bond futures erased the drop during an afternoon wobble in stock prices before finishing down 0.07%. The yield on sovereign notes due in a decade stood at 2.74%.
Expectations the government will roll out fiscal stimulus measures after a disastrous set of manufacturing data for February implies more issuance, which typically adds pressure to the existing bond market. Previously, China's local governments were given the green light to sell 1.8 trillion yuan ($256 billion) ahead of the national budget's approval, which has been delayed.
"There are still buying opportunities in bonds despite the recent gains, because the risks with the virus are haunting sentiment," said Ji Tianhe, a strategist at BNP Paribas in Beijing. The record-low manufacturing data have increased the potential for China's benchmark deposit rate to be cut for the first time since 2015. A reduction "may trigger another quick rally in government bonds," added Mr. Ji.
As much as Chinese yields fell in February, the drop was even bigger for 10-year U.S. Treasuries as the Federal Reserve has opened the door to a rate cut. Given their yield premium, this makes yuan notes appealing, said Julio Callegari, a portfolio manager at J.P. Morgan. With China's 10-year sovereign yield logging four consecutive months of declines, any further price gains may not be as sharp. Some onshore investors may take profits when the metric reaches 2016's low of 2.64%, said Edmund Goh, a portfolio manager at Aberdeen. Added strength is also liable to be limited by the sales of new local-government bonds, according to BNP Paribas' Mr. Ji.
Still, "if you're not positioned in the market, you should add either" government or policy bank notes, said Mr. Goh, adding he bought such debt over the past few weeks. "We usually will be cautious in these markets, even if we would like additional duration risk in the next few months."