The S&P China Bond Index is targeted to provide global investors an independent, transparent and broad-based benchmark. A study of the index returns revealed two interesting facts on the Chinese bond market volatility.
1) While the volatilities of most Asian bonds retreated in the past year, the Chinese bonds have actually become more volatile. The historical data of the S&P China Bond Index showed that its one-year volatility stood at 3.45%, compared with its five-year volatility of 2.26%, please see Exhibit 1 below. However, China is not alone; Indonesia and Philippines also witnessed a rise in the volatility in the same period.
This heightening of volatility in Chinese bond market would be a response to the rapid growth and regulatory development, as well as the opening up of the onshore bond market. Notably, the expansion of the Renminbi Qualified Foreign Institutional Investor (RQFII) program offers global investors easier access to the Chinese onshore bond market.
Despite the recent increase, the volatility of Chinese bonds remained comfortably low and below the average volatility of Asian bonds represented by the S&P Pan Asia Bond Index.
2) The Chinese government bonds are more volatile than the corporate bonds in the past year! While the volatility of corporate bonds is generally higher than that of government bonds over a longer time-frame, the one-year historical volatility of the S&P China Government Bond Index (3.61%) is higher than the S&P China Corporate Bond Index (3.32%). At a closer look, the S&P China Agency Bond Index was the most volatile sector-level index. In fact, the S&P China Agency Bond Index outperformed all government sector-level indices and rose 6.87% YTD, while its yield-to-worst also tightened by 100bps to 4.69%.
*Source: S&P Dow Jones Indices. All data are as of August 29, 2014.
For more details, please read “A Deep Dive Into Chinese Fixed Income”.
Exhibit 1: Historical Volatility of the S&P China Bond Index