SHANGHAI (Reuters) – Investors have become net sellers of Chinese government bonds (CGBs) in recent weeks, a BNY Mellon indicator showed, as rising U.S. yields and an aggressive American vaccination drive eat into the appeal of Chinese bonds.
BNY Mellon’s iFlow indicator has shown “significant outflow” from Chinese government bonds this month, bank strategists said in a note, the first sustained net selling since global pandemic lockdowns began last year. The indicator presents flows as a weekly average, not by the value of net buying or selling.
Wee Khoon Chong, senior Asia Pacific market strategist at BNY Mellon Markets, told Reuters that narrowing spreads between Chinese and U.S. bonds and a flat Chinese yield curve weighed on demand. The relatively rapid rollout of vaccines in the United States has also dimmed the appeal of Chinese bonds relative to U.S. assets as expectations rise for a strong U.S. recovery.
The iFlow indicator tracks $41.1 trillion in assets under management under BNY Mellon’s custody and administration. The majority of CGB flows captured by the indicator are cross-border, Chong said.
Official data shows that offshore holdings of CGBs have risen every month since February 2019 and topped 2 trillion yuan ($307.25 billion) in February, even amid a global bond sell-off.
Wide spreads over U.S. Treasuries and a stronger yuan have boosted inflows, but recent weeks have seen those factors falter.
The yuan has weakened by about 0.85% against the dollar this month. Ten-year CGBs have seen their premium over U.S. Treasuries fall from about 250 basis points in October to less than 155 basis points this week.
Chong cautioned that narrowing spreads do not correlate directly with outflows. Factors such as diversification support continued flows into CGBs.
“The flow into China should continue to rise … but recently we have seen some willingness or increased urgency to hedge,” Chong said. “(We’re) not saying that this is the beginning of accelerated outflows, but at least it’s not a one-way track that is always inflows.”
($1 = 6.5093 Chinese yuan)
(Reporting by Andrew Galbraith in Shanghai)
