RMB bonds: Making a strong comeback

May 18, 2015

Offshore RMB bonds delivered lacklustre returns for most of the first quarter but have recently seen a significant turnaround as liquidity conditions have improved drastically. Further monetary loosening in China and easing liquidity conditions will continue to support a recovery in performance.

Improved market conditions for RMB bonds support recovery in recent performance
RMB bond market performance lagged behind earlier this year due to tightness in money market liquidity. Money market and swap rates had been elevated since late last year, which is normal during certain short periods of the year. However, the effect was exacerbated this time due to sharp depreciation of many currencies other than the USD. This had spurred demand for currency hedging, pushing the cross currency swap (CCS) rates sharply higher to uncommon levels. Tight liquidity and high CCS rates raises the cost of holding RMB bonds and had consequently created some selling pressure.

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