Bond markets may not be the most “sassy” of all the asset classes, but they certainly are a lot “cooler” in light of the global equity sell-off of the last two days. Bond markets are traditionally known to be less volatile than all of the financial asset classes. Global stock markets are taking serious hits over concerns that China’s growth is significantly slowing, and the impact this has for the world economy. Bonds on the other hand, have been relatively stable, and despite a Chinese Yuan devaluation earlier in the month, Chinese sovereign bonds haven’t moved much.
The China S&P China Sovereign Bond Index, an index to track the performance of local-currency denominated sovereign bonds from China, is currently yielding 3.19%, has had 1 year annual returns of 8.49%, and as of today, is trading at the exact same yield as of June 1, 2015. (Chinese equity volatility began in early June). Between June 1 and today, this index has yielded between 3.07% – 3.23%, a considerably tight range considering the uncertainty and volatility in the region. In particular, on the two biggest equity sell-off days globally, this index reacted in a rather “cool” manner: on Thursday, August 20th, the index yielded 3.21%, was unchanged on Friday, and then tightened to 3.19% as of Monday’s close. That’s a 3bps change. Even on the day of the Yuan devaluation, the index widened only 2bps in reaction.
What does this say about Chinese sovereign bond markets? They have low correlation to the Chinese equity market. They behave like most other AA rated bonds in terms of lower volatility and “flight to safety” behavior. Chinese sovereign bonds also have relatively higher yields compared to other AA rated countries.
The S&P Germany Sovereign Bond Index, has reacted similarly over the last few days. The S&P Germany Sovereign Bond Index yielded .20% on Thursday August 20th, tightened only 1bp to .19% on Friday the 21st, and closed Monday at .21%. Even the S&P Spain Sovereign Bond Index, an index with a higher risk profile than Germany, tightened 1bp from Thursday to Friday, to 1.20% and closed at 1.24% on Monday. Despite risk profiles, the stability of these indices show the appeal of bond markets in times of global market turmoil.
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