China’s Negative Yield Bond Gets Positive Response

China’s first-ever sale of a negative-yield bond drew strong demand from investors seeking exposure to an economy that is returning to pre-pandemic growth rates.

The five-year, 750 million euro bond offering a yield of minus 0.152% was part of a 4 billion euro sale of debt by the Chinese government that attracted final orders of about 16 billion euros.

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While the bond’s yield was negative, the five-year German Bunds, which are typically seen as a safe haven, hovered around minus 0.74% on Thursday.

“You can think of it as a yield grab: you are starved for return and any opportunity you get to pick up some extra premium on a yield, you’re going to buy that up quite quickly,” Rohan Khanna, a rates strategist at UBS, told The Wall Street Journal.

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The Chinese debt sale also included 10- and 15-year securities with positive yields of 0.318% and 0.664%, respectively. About 72% of investors were from Europe, the Middle East and Africa.

The strong demand “shows investors are still underexposed to China and there definitely is a scarcity value perceived in these bonds,” Sam Fischer, head of China onshore debt capital markets at Deutsche Bank, told the Financial Times.

According to CNN Business, the sale “also indicates that investors want more exposure to China’s economy, which is recovering from the pandemic at a quicker pace than Europe and the United States.”

Following a historic contraction in the first quarter of 2020, China’s economy has rebounded rapidly, with GDP growing by 4.9% in the third quarter. The International Monetary Fund has predicted 8.2% growth in 2021.

In the U.S. and Europe, meanwhile, a spike in coronavirus cases is threatening to tip those economies back into recession in the fourth quarter.

Foreign investors held about 3 trillion yuan ($457 billion) of Chinese bonds at the end of October, with the Chinese debt market expanding by 40% annually over the past three years.

“International investors are full of confidence in China’s strong economic” despite the lingering pandemic, said David Yim, head of capital markets for Greater China and North Asia at Standard Chartered Bank.

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