Oct 25, 2019 03:25 AM

China Bond Investor Who Predicted Sell-Off Now Sees Recovery

Investors are turning bullish on Chinese bonds. Photo: Bloomberg
Investors are turning bullish on Chinese bonds. Photo: Bloomberg

(Bloomberg) — All the action in China’s markets is now in government bonds, where a sudden sell-off this month contrasted with subdued moves elsewhere. One contrarian says it won’t last.

The yield on benchmark 10-year sovereign debt is up 20 basis points since a three-year low Sept. 6, ranking it among the worst performers in Asia. A basis point is a hundredth of a percentage point. Meanwhile, stocks have turned the least volatile since early 2018, while the previously wild yuan has traded around 7.08 per dollar for almost two weeks.

Although many analysts and investors were blindsided by China’s bond rout, BNP Paribas Asset Management’s Jean-Charles Sambor cautioned in August against buying onshore notes. He’s now more positive on yuan-denominated debt, saying the price is attractive, and predicts the 10-year yield will revert to 3.1% by the end of the year. Worsening economic data is strengthening the bull case for bonds, he says, as Beijing may ease monetary policy.

“A turning point should be here pretty soon,” said Sambor, BNP Asset’s deputy head of emerging market debt in London. “We see value in policy banks and will continue to buy in the adjustment.”

Rising yields are a natural consequence of returning risk appetite globally this month after trade tensions eased between Washington and Beijing. But in China, the rout was made worse by faster-than-expected inflation and whispers that authorities may limit the sale of bond funds. Concerns over liquidity and a prudent central bank have also added to pessimism.

While China funneled 200 billion yuan ($28 billion) of one-year cash into the banking system last week, authorities have stayed clear of more aggressive measures this year. The central bank has injected a net 560 billion yuan through open market operations in the past four days ahead of a deadline Thursday for corporate tax payments.

The risk is that accelerating inflation may undermine a recovery for bonds — Beijing won’t want to inflate prices further by injecting more liquidity. China’s consumer price index will hit 3.5% by December as the deadly swine fever sends pork prices soaring, according to Bloomberg Economics. Inflation was at 3% last month, the fastest increase in prices since 2013.

Still, others echo Sambor’s bullish call on Chinese bonds. Wilfred Wee, a money manager at Investec Asset Management, said he considers the notes “a core holding.” Sun Lu, a strategist at Citigroup Inc., reiterated her “overweight” recommendation and said a likely lower supply of sovereign notes this quarter will support the debt.

China bonds will become more mainstream as some enter JPMorgan Chase & Co.’s flagship indexes next year, Singapore-based Wee said. That’s going to help support the asset class as more foreigners buy Chinese debt, he said.

The yield on China’s 10-year government bonds climbed one basis point to 3.22% as of 4:10 p.m. in Shanghai.

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