Original Title: Ignoring the U.S. Dollar and U.S. Treasury Yields Both Soared In September
Faced with the sharp rise in the US dollar index and U.S. bond yields in September, foreign investors’ enthusiasm for the allocation of renminbi bonds remains unabated.
Recently, the latest data on bond custody volume released by CCDC shows that as of the end of September, the denomination of RMB bond custody of foreign institutions reached 3,494.102 billion yuan, an increase of 88.52 billion yuan from the previous month, marking the largest order in the past four months. Monthly increase.
In the eyes of industry insiders, the large increase in foreign capital’s renminbi bond positions in September was indeed unexpected by the market. In the past, whenever the appreciation of the U.S. dollar led to a fall in the renminbi exchange rate and a rise in U.S. bond yields that narrowed the spread between China and the United States, the pace of foreign investment in increasing their holdings of renminbi bonds would slow down accordingly.
A bond trader of a large domestic bank told reporters that the reason why foreign investors increased their positions in RMB bonds in September is that the FTSE World Government Bond Index (WGBI) will be officially included in China’s treasury bonds on October 29, making overseas capital. The arbitrage of RMB treasury bonds has been increased in advance.
“In particular, the enthusiasm of overseas central banks and sovereign wealth funds to increase their holdings of RMB bonds is quite high.” A head of the fixed income investment department of a large domestic private equity fund pointed out to reporters. Although the U.S. Treasury yields have continued to rise since the Federal Reserve is about to reduce QE since September, the US Treasury default crisis has not been properly resolved, and overseas central banks and sovereign wealth funds have steadily increased their positions in RMB bonds in response to potential black swan events.
The data shows that among the RMB bond varieties that foreign investors increased their positions in September, high-credit-rated Chinese government bonds and policy financial bonds are still their key varieties to increase their allocation. That month, overseas capital increased its holdings of Chinese government bonds and policy financial bonds to 77.124 billion yuan and 15.187 billion yuan respectively.
“In fact, with the recent sustained surge in global energy prices leading to rising inflationary pressures, more and more global asset management agencies need to increase the allocation of high-yield, high-credit-rated bonds to achieve real positive returns, while China’s national debt is in the same credit-rated national debt The highest rate of return here will undoubtedly become an important choice for them to obtain actual positive returns.” The head of the fixed income investment department of a large domestic private equity fund emphasized.
WGBI index inclusion effect leads overseas capital to increase positions ahead of schedule
At the end of March this year, FTSE Russell stated that starting from October 29, the FTSE World Government Bond Index (WGBI) will be officially included in China’s Treasury Bonds and will be completed in the next 36 months, accounting for 5.25% of the index weight after completion.
According to industry insiders, this is one of the important factors that drove overseas capital to increase their positions in China’s treasury bonds in September.
“Every time China’s national debt is included in the world‘s important bond index, there will be a wave of overseas capital to increase the position of China’s national debt.” The aforementioned large state-owned bank bond trader analyzed to reporters. The reason is that these overseas capitals hope to deploy in advance, and obtain considerable return on spreads when overseas capital follows the world‘s important bond indexes to increase positions in Chinese government bonds (which triggers the rise in Chinese government bond prices).
A chief representative of the Asia-Pacific region of a European asset management agency explained to reporters that, in fact, the reason why overseas capital deployed to buy Chinese treasury bonds in advance may not necessarily come from trading opportunities such as profit from spreads. The reason is that most overseas capital’s allocation strategy for China’s government bonds is mainly to hold them to maturity. Therefore, the level of its holding cost will greatly affect the actual return of its holding maturity strategy. If they can hold Chinese government bonds at a lower cost before other overseas capital follows the global bond index to allocate Chinese government bonds, they will undoubtedly earn a higher return on holding maturity strategies than other peers.
Liu Jie, head of China’s macro strategy at Standard Chartered Bank, previously pointed out that within one year after Chinese government bonds are included in the WGBI index, Chinese government bonds will receive a global passive capital inflow of 130 billion to 156 billion U.S. dollars.
Reporters have learned from many sources that the current Chinese government bond positions held by many overseas foreign investment regulatory agencies have been significantly higher than the proportion of Chinese government bond rights stipulated by the WGBI index. The reason is that the current average yield of China’s 10-year treasury bonds is about 2.9%, which far exceeds the average yield of WGBI bonds (0.58%). By overweighting Chinese government bonds, these overseas foreign investment regulatory agencies can effectively resist the current rising inflationary pressure and enable the global bond portfolio to achieve the expected real positive return.
“For many overseas central banks and sovereign wealth funds, the higher investment security of Chinese government bonds can also cope with the potential black swan event brought about by the default storm of U.S. Treasury bonds, ensuring the continued low volatility of the entire bond portfolio. “The chief representative of the European asset management agency in the Asia-Pacific region pointed out.
U.S. Treasury yields, the negative impact of the U.S. dollar surge are “overvalued”
From the perspective of industry insiders, the wave of overseas institutions’ premature increase of positions triggered by the imminent inclusion of Chinese government bonds in the WGBI index has largely offset the negative impact caused by the increase in the US dollar index and US bond yields in September.
After all, the main overseas capital for increasing Chinese government bonds in September is global ETFs and other asset management institutions that passively invest in Chinese government bonds following the WGBI index. Their investment strategies are not affected by the rise in both the dollar and U.S. bond yields.
Many people from global asset management institutions pointed out that, in fact, the negative impact of both the USD and U.S. bond yields on the increase in foreign capital’s renminbi bond positions in September may not be significant.
“We internally estimate that out of the overseas capital (88.52 billion yuan) for increasing positions in RMB bonds in September, about 65 billion yuan was passive investment funds following the WGBI index, and the remaining capital was actively allocated to increase positions in RMB bonds.” Wall Street macroeconomic hedge fund managers pointed out to reporters. The reason is that despite the Fed’s attempt to reduce QE in September to increase U.S. Treasury yields and the U.S. dollar index, RMB bonds still have three major advantages to attract global investment institutions. First, the correlation between Chinese government bonds and U.S. Treasury bonds is low, which makes U.S. Treasury bonds. The impact of the default storm on the price changes of Chinese government bonds is relatively low, making Chinese government bonds have a higher safety cushion effect; second, the yield of Chinese government bonds is relatively high, which has higher asset allocation attractiveness when global inflation pressure continues to rise. ; The third is that Chinese government bonds will continue to be favored by funds due to the inclusion of the WGBI index, which can effectively alleviate the risk of violent price fluctuations.
It is worth noting that as global inflationary pressures heat up, more and more overseas investment institutions are focusing on renminbi bonds, aiming at policy financial bonds with the same credit rating but higher yields, thereby increasing the bond portfolio return rate to run higher. Win inflation.
“More and more overseas investment institutions have noticed that in the face of both the U.S. bond yields and the U.S. dollar index rising in September, the decline in the RMB exchange rate and the reduction in the spread between China and the U.S. are lower than in other emerging market countries, indicating that RMB assets have stronger assets. To a certain extent, the resilience of foreign capital is also driving overseas capital to continue to increase the allocation of RMB bonds.” He pointed out.
(Author: Chen Zhi Editor: Bao Fangming)
.