China is becoming the new haven of the bond market?
While the yield on the 40-year US government bond exceeds the 5.3% mark, for the first time since the early 2000s, the Chinese bond market is moving in an almost completely opposite direction.
The yield on the 5-year Chinese bond fell by 7% in one day, a very unusual move in the government bond market.
Also the rest of the Chinese yield curve is at very low levels:
5 years: 1.431% 10 years: 1.683% 20 years: 2.148% 30 years: 2.166%
The 10-year yield is just above its historical low, which stood at 1.59%.
Why are yields in China so low?
Bond yields tend to fall when investors believe the economy is weakening and that the central bank will need to cut interest rates.
And this is exactly the story unfolding in China.
Fixed asset investment fell by 6.7% in the first months of the year, retail sales rose by only 0.6%, and the unemployment rate stands at 5.2%.
In other words, the Chinese economy is still grappling with weak demand and investment, and therefore the market is pricing in a very low interest rate environment.
But here begins the more interesting story.
Foreign money begins to return
In May, foreign investors' holdings of bonds in the Chinese interbank market grew by 90 billion yuan, about $13.3 billion.
This was the first net inflow of foreign money into the Chinese bond market in over a year.
Foreign holdings of Chinese government bonds alone grew by 61 billion yuan, the largest jump since December 2023.
Also during March, an interesting phenomenon was observed: during the escalation around Iran, Chinese bonds attracted about $2.5 billion, while bond markets in other emerging countries lost about $16.7 billion, according to the Institute of International Finance.
But the picture is not yet one-sided.
In July, foreign investors sold about $3.4 billion of Chinese bonds, while emerging market bond markets actually received about $18.8 billion.
In other words, it is still too early to talk about a permanent shift of global capital to China.
So why buy bonds with a yield of 1.68%?
This is precisely the important point.
A foreign investor buying a 10-year Chinese bond with a yield of 1.68% is not getting a particularly attractive return here.
They are probably buying something else: stability.
As US and Japanese bonds begin to lose some of their role as a safe haven, investors are looking for additional places to park capital.
The 10-year US bond yield is approaching 4.70%, while the 10-year Japanese yield reached its highest level since 1996.
At the same time, Reuters reported that global asset managers have become net buyers of Chinese stocks and bonds, a market many of them described as 'uninvestable' just two years ago.
And this is the important change.
China may not offer the highest return, but it is beginning to be seen again as part of the solution for risk management in a global portfolio.
But there is a significant limitation here
The Chinese bond market is still significantly smaller than the US government bond market, and its liquidity is lower.
In addition, Beijing continues to significantly control capital movements, and therefore foreign investors do not have the same freedom of action they have in the US market.
Therefore, even if we see more foreign money entering China, it is difficult to see Chinese bonds replacing US bonds as the world's primary safe haven in the near future.
But the very fact that investors are willing to hold Chinese bonds with a yield of less than 2%, while demanding much higher yields from the US and Japan, says something important.
Global money is beginning to seek not only return, but also stability.
And if this trend continues, Chinese bonds may gradually transform from an asset representing the weakness of the Chinese economy, to an asset investors use precisely to diversify global risk.