For the first time in two years, foreign institutions reduced their holdings of mainland government bonds by 16.5 billion in March

Foreign institutional investors reduced their holdings of Chinese government bonds by CNY16.5 billion in March this year, the first decrease in the size of overseas investors’ holdings since February 2019.

According to data from the China Bond Depository (Central Government Bond Registration and Settlement Co., Ltd.), the balance of CGBs under custody stood at CNY2,044 billion at the end of March, and overseas investors reduced their holdings of Chinese government bonds by CNY16.5 billion in March compared with February, Reuters reported on April 7.

The report said foreign investors’ enthusiasm for buying Chinese bonds has cooled significantly as the interest rate differential between China and the U.S. has narrowed further. The latest statistics from the China Foreign Exchange Trade Center (CFETS) show that in March, foreign institutional investors bought a net 51.4 billion yuan of bonds in the interbank bond market; this is a big drop of more than 60% from last month’s size, and even less than 20% of January this year.

According to Reuters on Feb. 26, U.S. 10-year bond yields rose sharply on Feb. 25 and hit a one-year high due to economic recovery and inflation expectations. The U.S. 10-year bond was last reported near 1.47%, and the mainland interbank market with the same maturity Treasury 200016 was last traded at 3.275%, with a spread of about 180 basis points (bp) between the U.S. and China, hitting a new 11-month low since early April last year.

Hong Hao, managing director of CBI, said on Weibo that the 1.5% yield is important for 10-year U.S. bonds because it means that “U.S. bond yields are starting to outperform S&P dividend yields. In other words, this single indicator shows that U.S. bonds are more attractive than U.S. stocks.”

At the time, a report from the fixed income team at the Guotai Junan Securities Institute concluded that there was still room for U.S. bond rates to move higher during the year, but not much room. Considering the continued improvement of the epidemic, the acceleration of vaccination, and the blue camp sweep to release more fiscal space, the 10-year U.S. bond rate is expected to be capped at 1.50-1.70% with reference to the level before the outbreak in February 2020.