Portfolio | China’s bond market braces for uncertainty
Resumption of IPO and changing focus from monetary to fiscal stimulus clouds future direction of the bond rally
It has long been feared that a rebound in the equity market and a resumption of initial public offerings will spell the end of a bond rally in China. That scenario materialised with regulators reopening the floodgate for IPOs. The fixed income market though found something more profound to worry about.
China’s bond market has revelled in a rare combination of macro trends this year, immense deregulation on new issuances, a monetary easing cycle and an equity rout that left investors with little choice but plunk their money into bonds to get some return on their assets.
Between September and October, the bond market saw some 1.4 trillion yuan flow in, partly from funds dedicated to IPOs, partly from an unwinding of margin financing, estimated Deutsche Bank strategist Linan Liu.
With the reopening of the IPO market, it raised the question “to what extent will the inflows reverse”, Liu wrote in a report.
“We believe liquid bonds (central government bonds and policy bank bonds ) are particularly vulnerable to outflows. As the equity market sentiment turns, we believe redemption pressure of fixed income funds and wealth management products will force liquidation of bond investment,” wrote Liu, who expected yields of the benchmark 10-year government bond to shoot up to 3.4 per cent- 3.5 per cent and downgraded government bonds from overweight to neutral.
Such forecast is a far cry from three weeks ago, when the People’s Bank of China cut interest rates for the sixth time in a year, which prompted some analysts to cheer the 10-year government bond yield would inch below 3 per cent, a level last seen in the aftermath of the 2008 financial crisis.
