Chinese sovereign bonds to outperform corporate debt, says Investec

Chinese government bonds should outperform corporate debt in both the onshore and offshore markets this year, which may in the process mean a widening of credit spreads, according to Investec Asset Management emerging market fixed income portfolio manager Wilfred Wee.

The South African firm which manages assets worth more than 150 billion pounds (US$209 billion) has been buying onshore Chinese sovereign debt toward year-end after yields have risen to attractive levels due to the deleveraging efforts by the People’s Bank of China.

Upcoming headwinds to the nation’s economic growth also means inflation will be capped, limiting room for further rises in yields while Chinese bonds will generally become a core asset class for international investors as China opens up, Wee said.

In contrast, China’s corporate debt market did not experience any losses despite tighter liquidity conditions on the mainland, Wee said.

The yield on lower-risk, high grade AA-rated 3-year notes rose by 120 basis points (bps) last year to the current levels of about 5.8 per cent. But the yield on riskier, lower grade A-rated issues of the same maturity rose 97 bps to 10.5 per cent. In the process, the yield spread between the two types of credit paper narrowed 24 bps to 469 bps.