The recent February bond custody data released by CCDC shows that the denomination of RMB bond custody of foreign institutions reached 3152.469 billion yuan in February, an increase of 95.694 billion yuan from January this year.
So far, overseas institutions have increased their holdings of Chinese bonds for 27 consecutive months.
Judging from the types of bonds that foreign investors have increased their holdings, interest rate bonds are still the most popular.
Data show that in February, the amount of foreign institutions in ChinaBond Treasury bond custody increased by 61.8 billion yuan, and the proportion of treasury bond holdings in the amount of treasury bond custody rose to 10.62%.
In addition, at the end of February, the balance of policy bank bonds held by foreign institutions was 987 billion yuan, an increase of 30 billion yuan that month.
Among the bonds invested by foreign institutions in February, government bonds and policy bank bonds together accounted for more than 80%.
The spread between China and the United States is considered by the market to be one of the reasons why foreign investors are more motivated to increase their holdings of Chinese bonds, but this key factor has changed since this year.
Recently, the global epidemic situation has shown signs of improvement, coupled with the continuous advancement of vaccination worldwide, which has led to the strengthening of market expectations for economic recovery, and the rapid rise of inflation expectations.
In this context, market inflation expectations have risen, and the yields of US long-term Treasury bonds have risen rapidly.
On March 19, the 10-year U.S. Treasury bond yield rose sharply by 8.9 basis points, hitting a 14-month high, breaking through 1.75% at one time.
The yield on the 2-year Treasury bond rose by 3 basis points to 0.159%, and the yield on the 30-year Treasury bond rose by 3.8 basis points to 2.476%, the highest level since July 2019.
Since late January, the long-term government bond yields of developed economies such as Britain and Germany have all increased significantly.
As US Treasury yields have risen sharply, the 10-year Treasury yield spread between China and the United States has continued to narrow this year. The spread has narrowed from more than 200 basis points at the beginning of the year to about 175 basis points.
Judging from the data in the first two months of this year, although the Sino-US interest rate gap has narrowed, it has not had a significant impact on the increase in foreign holdings.
According to data recently released by the China Foreign Exchange Trade System, as of the end of February 2021, 471 foreign institutional investors have entered my country’s inter-bank bond market through the settlement agency model on the basis of legal persons, and one new one was added this month; 641 overseas institutions Investors entered the market through the Bond Connect model, and 5 new ones were added this month.
CICC fixed income analysts believe that taking into account the Spring Festival holiday in February this year, foreign institutions have increased their holdings in a single month.
This also shows that although US bond yields rebounded sharply in February, resulting in a narrowing of the Sino-US interest rate gap, it did not prevent foreign capital from actively increasing the allocation of Chinese bonds.
"China's bond market is becoming a global safe haven." CICC fixed income analysts believe that the correlation between China's bond market and overseas bond markets is very low, and the relative value is still high.
With the rapid recovery of US and European bond yields and violent fluctuations in global financial market valuations, the safe haven properties of the Chinese bond market have increased. This is an important reason why overseas central banks, sovereign funds and other institutions continue to increase their positions in Chinese bonds.
The "Report on the Implementation of China's Monetary Policy in the Fourth Quarter of 2020" shows that in 2020, foreign funds will flow into my country's bond market by more than 1 trillion yuan, and more than 60% will be long-term funds of foreign central banks.
"Foreign institutional investors will continue to increase their interest in Chinese bonds." Zhao Yaoting, a global market strategist for Invesco Asia Pacific (except Japan), believes that in Asia, the yields of both government bonds and corporate bonds have remained basically stable. Moreover, China's 10-year Treasury bond yield still has a spread of about 175 basis points compared with that of the United States.
In addition, China's core inflation rate is limited.
In the future, foreign investors' interest in Chinese bonds will remain high.
Other analysts believe that the high yield of RMB bonds is also an important source of its attractiveness.
The yield of RMB bonds provides a certain buffer against fluctuations in bond prices, which is also an important reason why foreign institutions will continue to invest in Chinese bonds in the future.
Chinese bonds are expected to be included in the FTSE World Treasury Index (WGBI), one of the three major global bond indexes in the near future. If successfully included, the Chinese bond market will usher in more incremental funds.
All parties in the market are currently optimistic about this.
It is expected that FTSE Russell will start the Nasdaq in October 2021 and complete it within 12 months.
According to market estimates, the full inclusion of WGBI will introduce about US$150 billion in index tracking funds for the Chinese bond market.
Our reporter Chen Guojing