US bonds expected to underperform as China bond yields rise

Investors are shifting their positions in fixed income, and looking for more ESG opportunities in their private equity investments, according to a Manulife Investment Management report.
US bonds expected to underperform as China bond yields rise

Institutional investors are expected to continue cutting US treasury holdings for China onshore bonds, as market observers believe US bonds may underperform in the short term, a new report has found.

“We believe there is a strong case for investors to consider allocating some of their exposure to China onshore bonds. The reason is because they have historically had a low correlation with US bonds and offer a yield advantage compared with US treasuries on an unhedged basis,” according to Paula Chan, senior managing director and senior portfolio manager for Asia fixed income at Manulife Investment Management (Manulife IM).

Paula Chan, Manulife IM

“On a more short-term basis, there is some risk that US bonds may underperform in the next six months if US treasury yields begin to move higher as the Federal Reserve considers tapering bond purchases and inflation stays elevated,” Chan told AsianInvestor.

She believes China’s central bank, the People’s Bank of China (PBOC), is turning slightly more dovish as the Chinese economy is expected to grow more slowly in the second half of the year. This should support the performance of China onshore bonds.

Chan was commenting on the latest edition of Manulife IM’s Global Intelligence Report, which contains its outlook for environmental, social and governance (ESG) risks, sustainable investing, private equity, and appeal of China bonds for global investors.

Source: Manulife IM


Japan’s Government Pension Investment Fund (GPIF), the largest pool of retirement money, made its biggest-ever cut to the weighting of US treasuries in its portfolio in its last fiscal year as weakness in the world’s safest asset led a global debt selloff.

GPIF lowered US government bonds and bills to 35% of its foreign debt holdings in the 12 months to the end of March, from 47% previously, according to Bloomberg’s analysis of the latest data. A GPIF spokeswoman declined to comment on the move, telling AsianInvestor it “refrains from telling our future investment strategy in order not to influence the market”.

While investors have been selling US treasuries, money has been pouring rapidly into the China bond market.

Foreign buyers added Rmb50 billion ($7.7 billion) to the nation’s sovereign debt in July, increasing their holdings to a record Rmb2.18 trillion, according to data from ChinaBond.

China’s 10-year government bonds currently yield 2.829%, compared with the US 10-year treasury's 1.31%.

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The report also highlighted how investor-driven demand for more sustainable business practices has prompted many private equity sponsors to implement higher standards of stewardship at portfolio companies.

General partners (GPs) are integrating ESG considerations into investment decisions, which may create new paths to value creation as global demand shifts toward more sustainable goods and services. Among which, ESG integration is also adding extra alpha for capturing such assets.

Two-thirds of limited partners (LPs) say that value creation is a leading driver of their ESG initiatives. Three-quarters expect sustainability to influence their investment decisions over the next five years; additionally, 86% expect ESG investment opportunities to increase, and 93% agree that focusing on ESG themes will generate attractive investment opportunities.

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