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Fixed Income

Asia Fixed Income: Diversifying into Chinese Bonds

Global investors continue to explore investment opportunities in China onshore bond market. Chinese bonds undeniably offer higher yields than other major bond markets. As of Nov 5, 2014, the yield-to-worst of the S&P China Bond Index stood at 4.09% with a modified duration of 4.15, see Exhibit 1.

Exhibit 1: Yield Comparison

Source: S&P Dow Jones Indices. The S&P China Bond Index, the S&P China Government Bond Index and the S&P China Corporate Bond Index are calculated in CNY. The S&P/BGCantor U.S. Treasury Bond Index, the S&P U.S. Issued High Yield Corporate Bond Index and the S&P U.S. Issued Investment Grade Corporate Bond Index are calculated in USD. Data as of November 5, 2014. Charts are provided for illustrative purposes.
Source: S&P Dow Jones Indices. The S&P China Bond Index, the S&P China Government Bond Index and the S&P China Corporate Bond Index are calculated in CNY. The S&P/BGCantor U.S. Treasury Bond Index, the S&P U.S. Issued High Yield Corporate Bond Index and the S&P U.S. Issued Investment Grade Corporate Bond Index are calculated in USD. Data as of November 5, 2014. Charts are provided for illustrative purposes.

More importantly, investing into Chinese bonds adds diversification benefits to a portfolio through the exposure to local rate, credit and currency. According to the S&P China Bond Index, the Chinese bonds have historically exhibited low to negative correlations to U.S. bonds.

The correlation between the S&P China Government Bond Index and the S&P/BGCantor U.S. Treasury Bond Index, considering monthly returns since Dec, 2006, is 0.25. And if we look at the corporate bond sector, the correlation between the S&P China Corporate Bond Index and the S&P U.S Issued Investment Grade Corporate Bond Index is -0.15, while its correlation with the S&P U.S Issued High Yield Corporate Bond Index is -0.22, see Exhibit 2.

Exhibit 2: Bond Market Correlation

Source: S&P Dow Jones Indices. The S&P China Corporate Bond Index is used to run the correlation with the S&P U.S. Issued High Yield Corporate Bond Index and the S&P U.S. Issued Investment Grade Corporate Bond Index, in orange color. The S&P China Government Bond Index is used to run the correlation with the S&P/BGCantor U.S. Treasury Bond Index, in red color. Correlations are based on the monthly returns since December 29, 2006. Data as of November 4, 2014. Charts are provided for illustrative purposes.
Source: S&P Dow Jones Indices. The S&P China Corporate Bond Index is used to run the correlation with the S&P U.S. Issued High Yield Corporate Bond Index and the S&P U.S. Issued Investment Grade Corporate Bond Index, in orange color. The S&P China Government Bond Index is used to run the correlation with the S&P/BGCantor U.S. Treasury Bond Index, in red color. Correlations are based on the monthly returns since December 29, 2006. Data as of November 4, 2014. Charts are provided for illustrative purposes.

The Chinese bond market has outperformed the U.S. treasury and corporate bond markets year-to-date as well. As of Nov 5, 2014, the S&P China Bond Index delivered a YTD total return of 10.08%.

Want to find out more about the S&P China Bond Index? Please click here.