China Chartbook – 2Q20: Fixed Income

KraneShares
By July 28, 2020 15:12

China Chartbook – 2Q20: Fixed Income

  • The bond market in China has been bullish after the COVID-19 pandemic outbreak, and China’s interest rate bonds have clearly outperformed global major assets. However, the global major asset prices started to surge in May and global equity market has rebounded to the level of early 2020. Oil price also picked up from negative territory to a moderate level, and gold price also hit a record high, whereas China’s interest rate bonds, uncommonly, plummeted. Most global asset prices witnessed a V-shaped rebound in 1H20.
  • We argue that the global economies’ massive monetary and fiscal policies are actually the major factor leading to the strong Vshaped rebound of asset prices. Looking forward, we don’t expect further massive stimulus policy, be it in Europe, the US, Japan, or in emerging markets. There has been marginal easing on stimulus policy from several countries. China is also slowing down its pace of monetary easing. Without further stimulus policy, it would be difficult to boost the economic confidence and risk appetite. In addition, such factors as the slowing implementation of monetary stimulus policy, resurgence of the COVID-19 outbreak in Beijing, and torrential rain in China could all possibly slow the economic momentum again. Therefore, after the V-shaped rebound of economic data and financial asset prices, there could be a slowdown in the rebound or even a double dip, in our view.
  • China’s bond yields rose sharply compared with interest rates from open market operations (OMO), lending rates and yields on wealth management products (WMPs). China’s bonds are also appealing compared with other major assets such as equity and other safe-haven assets. Therefore, investors could consider increasing exposure to China’s bonds in terms of the slowing economic momentum or its sheer prices.
  • Yields on credit bonds edged up following the rising yields on interest rate bonds, and therefore credit bonds became more attractive to be allocated. However, we expect credit spread s are unlikely to decline further given the relatively low credit spread, the potential increase in credit bond supply as well as rising credit risk. Therefore, yields on credit bonds will likely fluctuate along with that on interest rate bonds.
KraneShares
By July 28, 2020 15:12

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