Why a short duration approach could help unleash the potential of China bonds?

In this video, our head of Asian fixed income, Jim Veneau, addresses a few key questions when it comes to China’s bond market, and explains why a short duration approach could be beneficial when navigating this emerging dynamic credit market.

Full script below:

Q: Why investing in China Bonds?

A: China is world’s 2nd largest fixed income market at around USD17 trillion, balanced among government bonds, policy banks and diversified corporate credit, and China’s FI market is still fast growing. Its high nominal government bond yields, significant relative value in credit spreads, and diversification benefits of RMB exposure in hard currency portfolios may enhance performance.

Size, growth, yield, relative value, and diversification can all benefit global strategies. For example, high government bond and policy bank yields at A1/A+ ratings means less credit risk is required to achieve yield targets. China’s bond markets also include offshore USD and CNH issues, which often offer higher yields compared to onshore counterparts, and can provide an additional alpha source.

Source: BIS, and AXA IM Research. For indicative purposes only. Data as of January 2021.

Source: BIS, and AXA IM Research. For indicative purposes only. Data as of January 2021.

Q: What are the benefits of Short Duration bonds?

A: Rising rates could result in significant losses in long duration bond portfolios, therefore, relatively high yields in Asia are not sufficient to cushion an environment of a rapid rise in rates. A short duration bond may not only outperform, but may also help to minimize capital losses during a period of rising interest rates where it may help limit downside performance

Q: Why China Green Bond?

A: China has joined the global battle against climate change by making an ambitious pledge to reach carbon-neutrality by 2060. Its green bond market is developing to support a transformation that will require hundreds of trillions in new investments. It is already home to the world’s 2nd largest green bond market, with annual issuance frequently topping the league tables since 2016. More importantly, it offers higher yields and shorter duration compared to global peers.

Source: CBI, Wind, and AXA IM Research. For indicative purposes only. As of 2021. Please note that totals may not sum to 100% due to rounding."