Finding the income with fixed income is becoming a daunting task in 2021, particularly for investors sticking with Treasuries.
The safest government debt isn’t yielding much, crimping income investors in the process. History also says that the lower a bond’s yield is upon purchase, the more upside is limited going forward. It’s no wonder some well-known investors are bashing bonds these days.
With yields on Treasuries and municipal bonds so low, it’s not surprising that some investors looking for income are embracing international bonds, particularly emerging markets debt. One way of doing that with a lower risk profile is with Chinese bonds and the VanEck Vectors China Bond ETF (CBON).
Fears of distress in China’s real estate sector caused credit spreads to widen. China Fortune Land Development defaulted, and developer China Evergrande is under considerable duress. Those situations should be acknowledged, but the case for CBON isn’t dead.
“The silver lining is that the impact of these moves appears to be contained. Market declines in the Chinese real estate sector have not spread to other sectors within China, all of which have positive total returns year to date,” says Fran Rodilosso, VanEck head of fixed income ETF portfolio management. “Within real estate, lower-rated names have been hit hardest. At a broader level, China is the only country among the ten largest by weights in the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index to have experienced overall spread widening this year.”
CBON, which tracks the ChinaBond China High-Quality Bond Index, sports a 30-day SEC yield of 2.62%, or double the comparable metric on 10-year Treasuries. The exchange traded fund holds 89 bonds with an average maturity of 6.42 years.
Fortunately, CBON is lightly allocated to real estate debt, the obvious corner of bond weakness in the world’s second-largest economy. Real estate bonds represent just 2.7% of CBOn’s roster, according to issuer data.
“Whether current spread levels in the real estate sector represent value depends on developers’ ability to deleverage and adhere to requirements, as well as the potential for additional regulations. Real estate is indeed the largest sector exposure within the high yield China corporate universe, but we note that containment of the market impact aligns with the approach of policymakers, which has been deliberate and targeted,” adds Rodilosso.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.