China bonds offers diversification to investors
While market participants have been focused on the inversion of China-US nominal yield spread, China-U.S. treasury-yield gaps in real terms are still trading in positive territory. It may be important to also look at real yields in the current inflationary environment, as investors may care about achieving positive real returns.
While China treasuries’ coupon income may become increasingly less alluring if compared to U.S. treasuries (and some other Asian government bonds) amid the narrowing China-U.S. yield gaps, they may be less prone to duration losses. China yields may be less likely to be affected by the continuation of the U.S. treasury selloff. Apart from investors whose plan is to hold the bonds until maturity, China treasuries may offer holding value against the backdrop of lower risks of mark-to-market losses. In fact, coupon income may not be able to make up for the duration losses. Furthermore, yuan stability may be another reason why global investors pursue China treasuries.
Bloomberg’s fixed income indices continue a nearly fifty-year tradition of market leadership, excellence and client service. For decades, these indices have been the most widely used for fixed income investors seeking objective, rules-based and representative benchmarks to measure asset class risk and return.
Bloomberg completed the inclusion of China government and policy bank bonds into the flagship Global Aggregate Index in November 2020. At the same time launched the Bloomberg Liquid China Credit (LCC) Index, designed to track the liquid, tradable portion of the RMB-denominated credit bond market. In order to represent the tradable, liquid component of the credit market, the LCC Index uses a unique methodology that incorporates CFETS trading volumes.
J.P. Morgan Asset Management (JPMAM) announced the debut of JPM Beta Builders China Aggregate Bond UCITS ETF (ticker: JCAG), the first global ETF to track Bloomberg China Treasury + Policy Bank + Liquid IG Credit Issuers Index, a bespoke index that constitutes of Bloomberg Liquid China Credit (LCC) Index, China treasury and policy bank bonds.
A combined China rates and credit exposure may offer diversification potential among otherwise uniform options and higher real returns compared to other FI markets.
“China bonds’ low correlation to traditional developed market bonds offers investors a good source of diversification, while the relatively high-yield potential supported by China’s easing monetary policy makes it a relatively attractive income generator in a low-interest-rate world,” said Sean Cunningham, Head of Asia ETFs at JPMAM. “For global investors seeking diversification and attractive yields, China bonds could be an increasingly accessible choice on the back of its evolving global index inclusion.”
“As the first product-tracking a variation of the Bloomberg Liquid China Credit Index, JCAG offers a new avenue to global investors to diversify their portfolios and seize opportunities in China’s fixed income,” said Ji Zhuang, Bloomberg Head of Indices, APAC. “China’s onshore credit market is an area often untapped by global investors, but interest is emerging.”
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