- China onshore bonds go into the Bloomberg Barclays Global Aggregate from April 1;
- Inclusion of China onshore bonds is a major change in global capital markets;
- Onshore bonds have a strong investment case.
Easter is coming but what links the Easter bunny and fixed income investors? Both will be busy both prior to and during Easter, but for different reasons. For the bunny, it's about distributing eggs. For fixed income investors, however, it's about adapting to a big change in global capital markets.
Chinese bonds are being included in Bloomberg's bond index from April
That's because from April 1, Bloomberg will begin including China onshore bonds in its Bloomberg Barclays Global Aggregate Bond Index.
Index inclusion will happen over 20 months and the onshore asset classes chosen will have an approximate 6% weighting in the Bloomberg Barclays Global Aggregate Bond Index, which has an approximate market cap of USD 2.94 trillion1.
The bond classes selected for index inclusion are government bonds, which are the safest and most liquid asset class available in the onshore China bond market.
A shift for global capital markets
And though index changes happen all the time, we believe this one is significant because:
- Adding onshore China bonds into a global index signals the asset class is 'safe-to-swim' for international investors;
- Other indexes, like FTSE Russell and JPMorgan, will likely follow suit in 2019;
- We expect strong foreign capital inflows into China's onshore markets, estimated at USD 250bn to USD 500bn2 by 2021.
With benefits for investors
But index inclusion will do more than just push global investors to China's bond markets, it will also bring benefits too, including:
- Positive nominal yields vs. developed markets: China 10-year government bonds offered nominal yields of 3.12% at the end of January 2019, compared with 2.67% for US 10-year treasuries, -0.02% for Japanese 10-year treasuries, and 1.22% for UK 10-year treasuries3.
- Access to attractive real yields vs. developed markets: China 10-year government bonds offered real yields of 1.21% at the end of January 2019, compared with 0.48% for US 10-year treasuries, -0.10% for Japanese 10-year treasuries, and -0.68% for UK 10-year treasuries4;
- Diversification benefits: China government bond benchmarks have low correlation to other major bond indices;
- A recent track record of strong performance. The Barclays China Aggregate returned 9.46% in 2018, compared with -0.3% for US Treasuries, and -0.5% for the S&P 500 index5.
So while April will be a busy time for the Easter bunny, it should also be a busy time for global investors.
That's because the benefits from index inclusion and the implied shifts in global capital markets means that China is now, more than ever, too big to ignore.
Dr Zhu Min explains the importance of index inclusion to China's markets.
Fixed Income investments from a global player
Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© UBS 2019 The key symbol and UBS are among the registered and unregistered trademarks of UBS.