By Li Gu, Casey Hall and Jiaxing Li
SHANGHAI/HONG KONG, June 15 (Reuters) – Global asset managers have been adding Chinese government bonds to their portfolios since the Iran war broke out, drawn not by yield but by their near-zero correlation with Western markets.
Amid a global rout in sovereign debt since March that has sent benchmark yields soaring between 35 and 60 basis points (bps) in the U.S., Britain, Europe and Japan, yields on equivalent CGBs have declined 8 bps.
The striking outperformance has caught the attention of real money investors – from sovereign funds and central banks to insurers – prompting a re-assessment of portfolio construction even as it pushed Chinese yields to the lowest outside Switzerland.
Chinese debt is attracting investors with a “preservation mandate,” offering regional portfolios a low-volatility counterbalance to riskier, higher-yielding assets, said Wei Li, head of multi-asset investments at BNP Paribas Securities.
“Attractiveness is judged on a risk-adjusted footing. China delivers exceptional price stability.”
The market has stood out all the more as other, more traditional havens have faltered. Bullion, for example, is down some 25% from its January highs.
Even with the months-long conflict closer than ever to a conclusion after the U.S. and Iran reached a deal to end hostilities and reopen the crucial Strait of Hormuz, many of the tailwinds for China’s bond market remain in place, such as structurally low price pressures, a dovish central bank and massive domestic investment.
The Guotai 10-Year China Treasury ETF has returned 1.26% so far this year, against a 2.57% fall for the U.S.-focused iShares 7-10 Year Treasury Bond ETF and a 1.23% decline for Invesco’s equivalent Euro bond ETF.
“If you look at correlations between CGBs and European rates, it’s close to zero. That has its attractiveness,” said Matthias Dettwiler, head of active fixed income at UBS Asset Management.
For investors whose goal is capital preservation or portfolio diversification, “I would even go as far as to say the absolute yield doesn’t matter so much”, he said.
Foreign investors bought Chinese onshore yuan-denominated bonds in May for the first time since April 2025, official data showed on Monday.
Foreign institutions held 3.21 trillion yuan ($475 billion) in bonds traded on China’s interbank market as of the end of May, the central bank’s Shanghai head office said, up from 3.12 trillion yuan a month earlier.
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Insulating China’s debt market from the turbulence wrought by the Middle East oil shock are the country’s ample energy reserves and muted price pressures from persistently sluggish consumption.
A glut of household savings that banks are channelling into the bond market is also acting to pin down yields.
“Liquidity plays a big part in driving the CGB markets, and liquidity conditions have remained extremely abundant,” said Jerome Tay, senior investment manager of fixed income at Aberdeen in Singapore.
Chinese 10-year yields at 1.75% are now about a percentage point below Japan’s, flipping a dynamic in place until late 2025, where Japan was the rock bottom of the rates market.
However, unlike in Japan, where yield destruction from a decade of massive central bank stimulus and two decades of deflation before that sent capital pouring overseas, China’s tight capital controls are keeping money within its borders.
And in contrast to Japan, Europe and the U.S., China’s central bank is leaning dovish, with inflationary pressures firmly in check.
“This divergence in macro conditions and policy stance helps explain why China’s bond market has remained relatively stable within a more volatile global rates environment,” said Stephen Chang, PIMCO portfolio manager for Asia.
“We continue to maintain overall exposure to China bonds, focusing on relative value opportunities.”
($1 = 6.7631 Chinese yuan)
(Reporting by Li Gu and Casey Hall in Shanghai and Jiaxing Li in Hong Kong; Editing by Tom Westbrook and Kevin Buckland)
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