Foreign investors reduced their holdings of Chinese government bonds.
On Wednesday evening, data disclosed by the China Bond Exchange showed that the size of Chinese government bonds held by foreign institutions at the end of March was about 2.04 trillion yuan. According to Bloomberg’s calculations, foreign institutions reduced their holdings of Chinese government bonds by about 16.51 billion yuan in March, ending the previous 24 consecutive months of increased holdings.
The onshore yuan fell 1.28% against the U.S. dollar in March, as the 10-year U.S.-China bond spread contracted sharply due to a sharp rise in U.S. bond rates, having hit a more than one-year low of about 145 basis points at the end of March.
In late March, a Bloomberg survey of 18 institutions showed that half of the respondents thought the pace of foreign investment in China’s bond holdings would slow in the second quarter, while another four thought there would be a net reduction in holdings.
FTSE Russell confirmed in March that it will include Chinese government bonds in its flagship FTSE World Bond Index (WGBI) over three years from October this year, meaning the expected $130 billion in inflows may slow from earlier expectations.
According to Bloomberg’s summary of data from the China Bond Exchange and the Shanghai Stock Exchange, foreign institutions also reduced their holdings of $149 million of local government bonds and $14.8 billion of interbank certificates of deposit at the end of March, with month-end holdings of $3.08 billion and $234.24 billion, respectively; and increased their holdings of policy bank bonds by $7.61 billion in March, with month-end holdings of $994.59 billion.
In addition, the 30-day historical volatility of China’s 10-year government bonds hit a new low this week since March 2018, making it difficult for investors to find direction as if they were “looking at flowers in a fog”.
Huachuang Securities analyst Zhou Guannan said that bond volatility is so low that it is difficult for brokerage firms to act, and the current long/short trend is not obvious, and institutions are cautious.
Li Yong, an analyst at Dongwu Securities, expects that the overall bond market volatility will remain low in April, and the market lacks trading opportunities.
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