The effect of RMB bonds entering into friction: overseas institutions over match Chinas national debt to avoid risks

 The effect of RMB bonds entering into friction: overseas institutions over match Chinas national debt to avoid risks

This means that after being included in the Bloomberg Barclays global composite index in April last year, RMB bonds have become a major component of the second major international bond index. Meanwhile, the FTSE world Treasury index (wgbi) has put Chinas bond market on the index watch list and will announce in March whether to include it.

Goldman Sachs predicted that in view of the asset size of tracking JPMorgans global emerging market government bond index series is about $226 billion, the entry will introduce about $30 billion of overseas index tracking funds for the RMB bond market, and will also lead to a large number of active investment funds.

In fact, many overseas investment institutions have taken the opportunity of bringing RMB bonds into gbi-em to continuously increase the allocation of RMB bonds. Sam Laughlin, an analyst at mkspam, a hedge fund, told reporters.

A number of Wall Street hedge fund managers disclosed to reporters that there are two driving forces to attract them to increase their positions in RMB bonds when they are incorporated into gbi-em. one is that the interest rate gap between China and the United States has recently reached a year high of 160 basis points. The other is that the RMB exchange rate has a stable fluctuation trend during the global spread of the epidemic, which has strong resistance to falling, making them tend to over match the RMB Bonds gain alpha excess returns.

Investment institutions seek to avoid risks

Reporters have learned from many sides that many overseas investment institutions have been rubbing their hands on the eve of RMB bonds being incorporated into gbi-em.

In fact, we have allocated RMB bonds according to the 3% weight of gbi-em. now, as RMB bonds are officially incorporated into gbi-em, we plan to increase the weight of RMB bonds to 4.5% in the next month. The U.S. macroeconomic hedge fund manager told reporters. One of the important reasons why the pace of allocation is much faster than gbi-em is that the global spread of the epidemic has led to a sudden increase in their demand for risk aversion of decentralized asset allocation.

In order to diversify investment risks, his hedge fund decided to increase the proportion of investment in emerging market assets from 18% to 25% at the beginning of this week, but when fund researchers found that the volatility correlation between RMB bonds and European and American bonds was significantly lower than that of other emerging market bonds, fund executives quickly made a new decision - to rapidly increase the proportion of RMB bonds in emerging market assets.

Reporters have learned from many sides that there are many overseas active investment institutions that take the above-mentioned actions.

At the beginning, we plan to consider the allocation of RMB bonds after gbi-em increases the weight of RMB bonds to 4%, because the fluctuation of RMB bonds will have a significant impact on our portfolios outperformance benchmark. However, in the novel coronavirus pneumonia epidemic spread to the global investment strategy, the fund changed its original plan, and then changed the GBI-EM weight to add Renminbi bonds in time. The head of a US fixed income fund told reporters. Behind this is that during the period when RMB bonds were included in the Bloomberg Barclays global composite index in April last year, the fund was not familiar with the scale and channels of RMB bond investment (such as bondcom or QFII), and could only gradually allocate RMB bonds from August last year. Now they are not only familiar with the transaction cost and capital settlement efficiency of different channels, but also hedge the interest rate and price fluctuation and other risks brought by RMB bond positions through overseas financial derivatives. Therefore, it is reasonable for the fund to accelerate the pace of allocation of RMB bonds with gbi-em.

According to the head of the US fixed income fund, another reason why the fund has accelerated its investment in RMB bonds is to resist the impact of large fluctuations in the net value of fixed income portfolio caused by the continuous innovation of US bond yield. As of 18:30 on February 28, the yield of 10-year US Treasury bonds hit a record low of 1.183% due to the influx of risk averse capital and the rising expectation of the Feds interest rate cut. However, there are concerns within the fund that if the Fed refuses to cut interest rates, the yield of US Treasury bonds will rebound sharply to 1.3%, their net value of leveraged fixed income portfolio will face a sharp fluctuation of more than 5 percentage points, which is the funds output The risk that people dont want to see.

In view of the fact that the proportion of overseas capital of RMB bonds is still relatively low, which makes the positive correlation between RMB bonds and bond price volatility in Europe and the United States not strong, over matching RMB bonds in advance can largely smooth the fluctuation range of net value of leveraged fixed income portfolio and highlight the stability of investment strategy. He pointed out to reporters. The fund also believes that the yield of 10-year Chinese treasury bonds will fluctuate between 2.65-2.85% in the future, which is significantly lower than that of US Treasury bonds in terms of volatility.

Mingming, deputy director of CITIC Securities Research Institute, predicted that under the combination of weak economy and broad currency, the target range of 10-year Treasury bond yield in the first half of 2020 is 2.6% - 2.8%, showing a stable fluctuation trend.

According to ED al hussainy, senior strategist at Threadneedle, a hedge fund, with the acceleration of overseas active investment funds allocation of RMB bonds following gbi-em index, the scale of overseas capital positions in RMB bonds this year is still expected to break the trillion yuan mark.

In fact, as the effectiveness of Chinas epidemic prevention measures has significantly improved Chinas economic fundamentals, more and more overseas investment institutions no longer regard RMB bonds as an integral part of the emerging market government bond index, but as an independent large asset allocation category, which means that their demand for RMB bonds allocation is far greater than their previous estimates. Ed al hussainy pointed out.

Overseas capital continues to favor RMB bonds

Data shows that since late February, the yield of 10-year US Treasury bonds has plummeted from 1.32% to a record low of 1.183% due to the hot pursuit of safe haven capital and the rising expectation of the Feds interest rate cut, which has caused the Sino US interest margin (the difference between the yield of 10-year us treasury bonds) to suddenly expand to 163 basis points, the highest value in the year.

This means that the risk-free return obtained by overseas investment institutions through mortgage financing of US bonds and then buying RMB bonds in the same period has exceeded the direct purchase of US bonds. A Hong Kong Bank foreign exchange trader told reporters. This has driven a large number of yen margin trading capital to exchange their US debt mortgage for funds in the past week, and then buy RMB bonds to gain higher yields.

As the RMB exchange rate stabilizes, many overseas long-term investment institutions have joined the camp of increasing RMB bonds. He pointed out. The reason is that the stable exchange rate makes the number of forward exchange rate swap trading points in the offshore market lower, and the operating cost of the whole exchange rate risk hedging transaction decreases by about 15 basis points compared with the beginning of the month. For long-term investment institutions, it has not small income attraction.

The chief representative of Asia Pacific region, a large European asset management institution, told reporters that his investment institution plans to buy more than 100 million yuan of RMB bonds in the near future, raising the allocation proportion of RMB bonds to about 4%, an increase of about 1 percentage point over the end of last year.

Our increased positions in RMB bonds are not only to win the excess returns brought about by the widening interest rate gap between China and the United States and the lower operating cost of exchange rate risk hedging, but also because Chinas epidemic prevention and control measures have achieved good results, so we dont need to worry about the stalled decline of RMB exchange rate and Chinas economy, which is exactly the weakness faced by some epidemic spreading countries. He stressed.