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

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