Chinese government bonds were rallying their way into J.P. Morgan's widely-tracked indices on Friday, as expectations of falling interest rates coincided with the pre-scheduled inclusion. After New York markets close, nine bonds with maturities of between five and 10 years will start a 10-month process of entering the Government Bond Index Emerging Markets (GBI-EM) suite, eventually giving China a 10% weighting in the flagship Global Diversified, which is tracked by $202 billion of funds.
That will draw $3 billion to China each month, according to analyst estimates. The inclusion "underscores growing interest in the world's second-largest bond market," Ming Leap, associate director for fixed income at HSBC Global Asset Management, said in a memo. The market is particularly attractive to international investors "at a time when nearly a quarter of the global bond market is offering negative yields," he said.
The inclusion could lend momentum to foreign purchases of Chinese government bonds, which has slowed since the end of December, Janice Xue, rates strategist at Bank of America Merrill Lynch, wrote in a research report on Thursday.
Chinese bonds were already rallying before Friday as fears of the spreading coronavirus outbreak sent investors rushing to safe-haven assets. Bond markets were cheered by China's rapid-fire measures to shore up investor confidence and keep businesses afloat as the epidemic hurt economic activity, which included steps to lower the costs of bank loans and bonds.
Yields on 10-year Chinese government bonds hit a fresh three-year low of 2.81% on Thursday, slumping 24 basis points over the past month. "I am optimistic that yields can go lower still," said Edmund Goh, Asian fixed income investment director at Aberdeen Standard Investments in Shanghai, who increased Chinese government bond positions in his portfolio around the Lunar New Year in late January when coronavirus cases started to spike in China. Karan Talwar, an emerging markets investment specialist at BNP Paribas Asset Management in Hong Kong, said investors required few incentives from the index publisher to tap Chinese bonds. "The J.P. Morgan inclusion on its own is not going to move the $13 trillion market," he said.
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