China Bonds Are Big Favorite for $438 Billion Europe Fund Giant

China learned valuable lessons from the 2015 currency-depreciation debacle that will ensure stability going forward, and that’s one reason Aviva Investors is a big fan of Chinese bonds.

Liam Spillane, head of emerging-market debt at the $438 billion European asset manager, says he’s kept an overweight allocation for Chinese government bonds even as they became a bigger part of benchmark indexes. “I’ll continue to grow that position as the benchmark evolves,” he said.

Spillane is impressed by regulators’ moves to open up and modernize the bond market and likes the yield premium China offers, without the magnitude of risks in other emerging nations. After the recent selloff, he particularly likes government debt maturing in 10 to 30 years.

“Given our confidence that they will continue to manage international access to that bond market, and will continue to keep the currency very stable — which is a critical point — we see much more value in that active position in the long end of the CGB bond curve,” Spillane said by phone.

China’s 10-year yields this week rose to the highest since February amid concern the central bank will mount only limited liquidity injections amid a wave of issuance of special sovereign notes in coming weeks.

At about 2.85%, China’s 10-year rates are well above the 0.70% on Treasuries, but about 2 percentage points below Brazil’s. That means they’re not as “exciting or racy” as some, but “quality adjusted,” they are especially attractive, Spillane said in the interview earlier this month.

“They have worked very, very hard to give international investors comfort about investing in that bond market,” Spillane said of Chinese authorities. “I expect them to continue to do so.”

That view hasn’t been universal. While overseas inflows to China’s bond market have continued to propel holdings to record highs, some fund managers have been wary of low trading volumes and capital controls. Bloomberg Barclays and JPMorgan Chase & Co. announced plans to add China to benchmark bond indexes last year, though FTSE Russellopted against the step. (Bloomberg LP owns Bloomberg Barclays and Bloomberg News.)

One thing that gives Spillane confidence with regard to China is exchange-rate stability — often a key question for developing nations like Indonesia or Brazil that are vulnerable to major depreciation.

Chinese authorities saw the cost of devaluation in 2015, with the volatility it created in domestic and overseas financial markets, Spillane said. Investors should expect policy makers to keep restraining volatility in the yuan-dollar exchange rate, he said.

“The hurdle is very high from them to allow the currency to materially depreciate,” Spillane said. “Because if they do so, they recognize that that will create significant uncertainty for international investors such as ourselves.”

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