Chinese bonds post best returns in a decade, with more gains seen

Chinese government bonds are primed for their best year in a decade, with local fund managers and strategists predicting more gains for 2025. They are set to reap a 9 per cent total return in 2024 – the highest since 2014 – as measured by a Bloomberg Index which excludes currency moves.

The nation’s 10-year yields have plummeted 84 basis points since January, dropping to 1.71 per cent on Dec 26. 

Chinese bonds have beaten major global peers in 2024 as prolonged economic weakness and a slowdown in consumer spending drive bets for more monetary easing. Tianfeng Securities, Zheshang Securities and Standard Chartered Bank forecast 10-year yields to drop to as low as 1.5 per cent to 1.6 per cent by the end of 2025.  

“There are a lot of uncertainties for the economy next year, with much pending on the development of trade conflicts and the dollar’s strength,” said fixed-income investment director Zhang Liling from Bosera Asset Management that oversees 29.7 billion yuan (S$5.53 billion) of assets. 

The rally lost a bit of steam last week on worries over a surge in debt issuance. China’s policymakers plan to sell a record three trillion yuan of special treasury bonds in 2025, up from one trillion yuan in 2024, according to a Reuters report. The Finance Ministry also reaffirmed its pledge to expand the fiscal deficit ratio and boost spending.

Still, history shows that the local bond market will likely absorb the increased supply, particularly if the People’s Bank of China maintains its accommodative stance and economic growth remains subdued. 

“We are still positive about bonds next year”, given the prospect for rate cuts, said Mr Zhu Zhengxing, who manages 74.5 billion yuan at Fullgoal Fund Management. Initial fears of a larger supply this quarter have hardly made a dent in market sentiment as demand kept increasing, he added. 

The impact of increased debt supply may have a more pronounced impact on the yield curve’s shape, rather than the overall direction of yields. Mr Zhang said he favours shorter- and medium-dated notes for 2025, adding that the downside for long-term yields is limited due to heavier issuance. 

Despite lower yields, Chinese bonds still offer value as a safe-haven asset, he said. “Very few assets offer certainty of not losing money in a deflationary environment.”  BLOOMBERG