Many fixed income face challenges in their efforts to increase income and yield without taking added interest rate or credit risk. Making those efforts all the more challenging is the fact that many developed markets outside the U.S. have historically low or even negative interest rates, a scenario explaining why money continues pouring into exchange traded funds holding U.S. Treasuries.
An area to consider for yield-hunting bond investors willing to consider emerging markets is China’s massive onshore bond market.
Accessing China’s massive onshore bond market has also been hard to access, but some U.S.-listed ETFs are changing that as well. With developed market benchmark yields from Germany to the U.S. tumbling, now could be the time for bond investors to consider allocations to ETFs such as the VanEck Vectors ChinaAMC China Bond ETF (NYSEArca: CBON).
CBON, which tracks the ChinaBond China High Quality Bond Index (CDHATRID), holds government debt, quasi-sovereigns and high-grade corporate bonds.
“The onshore Chinese bond market was, until several years ago, closed to foreign investors. Through a very deliberate, and directionally consistent process of liberalization, onshore Chinese bonds may become a significant weight in many, or most, global bond portfolios within the next two years. The impact on emerging markets bond indices and fund weightings will be even more significant,” said VanEck in a recent note.
CBON, which debuted in November 2014, holds 19 bonds and has a 30-day SEC yield of over 3.3%. The ETF has a modified duration of just over four years and a yield to maturity of 4.28%, according to issuer data.
Traders previously worried about President Donald Trump taking a firm stance on trade policy with China may also feel at ease after the U.S. President said that he became quick friends with Chinese President Xi Jinping during their meeting last month.
Ongoing reforms, notably from the supply side, could further support Chinese economic growth. Reforms have bolstered industrial profitability and strengthened commodity prices. China’s exporters are also enjoying improvements from a rebound in global trade.
“Opening up China’s bond market to foreign investors is a priority for policymakers, and supports ongoing efforts to internationalize the Chinese yuan (CNY) and provide a much needed alternative to domestic financing. In addition, the expected inflows from long-term foreign investors could help to ease domestic outflow pressures currently experienced,” notes VanEck. “Certain issues have prevented China’s inclusion in global bond indexes. Despite progress in opening up markets, the operational hurdles to do so remain onerous. Investors must have a local onshore custodian, and the registration process has proven to be somewhat lengthy and burdensome. There is still a need for greater access to onshore hedging tools, and certain tax rules remain undefined for foreign investors.”
For more information on the Chinese markets, visit our China category.