Aberdeen, Pictet Hunt Bargains Among China's Battered Bonds

(Bloomberg) -- China's biggest bond selloff in four years has left many securities in the $10 trillion market looking attractive to global funds including Aberdeen Standard Investments, Pictet Asset Management and AllianceBernstein LP.

Bargain hunting by such investors could add to speculation that the worst of the rout, which started in October, is drawing to a close. Five-year government bonds have bounced back in the past week, after a selloff that has still left the yield up 94 basis points this year -- the most since 2013 -- at 3.8 percent.

“China's onshore government bond yields definitely look very attractive, especially after the recent selloff,” said Cary Yeung, head of greater China debt at Pictet Asset Management, adding that he doesn't expect any drastic spikes in inflation, which would eat into bondholder returns. The firm's focus in the nation is on government bonds, policy banks and strong investment-grade companies that have strategic importance, such as utilities and railway operators.

The recent slump was sparked by signs authorities were stepping up efforts to trim the world's biggest corporate debt loads, after central bank governor Zhou Xiaochuan renewed warnings about high leverage. But authorities don't want any selloff to get out of control, and the domestic institutional investors that dominate the market have often bought on previous declines. For foreign investors, the increase in rates further burnishes the appeal over similarly graded countries like Japan, where some sovereign yields are negative.

Read more about support for China's tough love steps to rein in debt

AllianceBernstein has recently added exposure in its dedicated renminbi funds.

“We are monitoring the market closely for additional investments across a broader range of funds” through the Chinese New Year, said Brad Gibson, a fixed-income portfolio manager at the firm. 

Aberdeen Standard Investments is “more bullish” on Chinese policy banks than government securities, as the spreads on those names have widened, according to Edmund Goh, fixed-income investment manager. The firm has been increasing investments in such notes, as well as those from state-owned and private sector firms, he said.

Index Boost

Volatility in China's onshore bond market is likely to rise, as the nation pushes ahead with deleveraging and allows defaults, according to BNP Paribas Asset Management.

Still, the firm sees “reasonable value” in Chinese government securities and policy bank notes, which could also get a boost from potential inclusion into major bond indexes, said Karan Talwar, investment specialist, emerging market fixed income.

“We're expecting a reasonably high probability that either the JPMorgan or the Bloomberg Barclays index might make an announcement for some of these bonds to be included in the indices,” within the next six months or so, said Talwar.

The People's Bank of China said last month that investments by overseas institutions in the nation's government bonds are exempt from taxes. Talwar said the improved clarity on tax treatment is another reason why index inclusion is becoming “closer to reality.”

UBS Asset Management similarly sees a high probability of further inclusion in 2018.

Read more on other forecasts for index inclusion

“If you are running a bond fund, it's probably one of the highest nominal yields in a very liquid market,” said Hayden Briscoe, head of fixed-income for Asia-Pacific in a press conference last week.

Bloomberg LP, the parent company of Bloomberg News, owns the Bloomberg Barclays-branded bond indexes.

To contact Bloomberg News staff for this story: Denise Wee in Hong Kong at dwee10@bloomberg.net, Judy Chen in Shanghai at xchen45@bloomberg.net.

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

©2017 Bloomberg L.P.

With assistance from Denise Wee, Judy Chen