China's Biggest Bond Tumble of the Year Seen as a Time to Buy

Updated on
  • Investor focus will return to fundamentals: China Securities
  • Ten-year yield drops after rising to 20-month high on Monday

The biggest tumble in Chinese bonds this year is offering a buying opportunity, according to the market’s top-ranked analysts.

Demand will rebound after asset managers sell investments tied to the part of banks’ businesses that are the targets of the latest crackdown on leverage, according to analysts at China Securities Co., the nation’s top bond research team as rated by local finance magazine New Fortune. Haitong Securities Co., which ranks third, said current yields are already offering value to long-term investors, such as insurance companies.

Chinese sovereign bonds have plunged in recent days, driven by concern surrounding an intensifying effort to reduce leverage in the financial system. The increased scrutiny was seen prompting banks to pull so-called entrusted investments -- funds that lenders farm out to external asset managers -- which have helped erase $315 billion of stock market value over the past six days and sent the benchmark bond yield to a 20-month high.

“Past experience about regulatory tightening indicates that while markets could be volatile at the beginning due to the adjustments, they return to trade based on economic fundamentals,” China Securities analysts led by Beijing-based Huang Wentao wrote in a note on Tuesday. “The bottom line is not much has changed in demand for asset management. If banks can’t invest in each others’ products, they have to turn to the bond market.”

The selloff began to show signs of abating on Tuesday, with the 10-year yield falling for the first time in four days. It slipped six basis points to 3.45 percent as of 5:24 p.m. in Shanghai, after climbing 10 basis points in three days. A China bond market index compiled by Bank of America declined 0.5 percent last week, the most since the period through Dec. 16. The yield is likely to move between 3.2 percent and 3.6 percent in the near-term, according to Haitong analysts led by Jiang Chao.

The People’s Bank of China injected funds in open-market operations for the sixth day in a row Tuesday, bringing net additions to 260 billion yuan ($38 billion), data compiled by Bloomberg show. The overnight repurchase rate retreated from the highest levels since April 2015, falling one basis point to 2.79 percent.

“After yields jumped more than 10 basis points in the past week, improving liquidity is helping sentiment in the bond market, prompting some tentative buying,” said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “However, I think the downside for yields is smaller than the upside.”