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Category Archives: Bond

Overseas Funds Cut China Sovereign Bonds for Record Fifth Month

Overseas investors cut holdings of Chinese sovereign bonds for a fifth month in June, the longest string of outflows on record, as rising US Treasury yields reduce the attractiveness of yuan-denominated debt.

Global funds held about 2.3 trillion yuan ($340 billion) of Chinese government bonds in June, according to data released by the People’s Bank of China. That’s less than the 2.38 trillion yuan of the securities they owned in May, according to official Chinabond data, and marks the longest stretch of monthly outflows since Bloomberg began tracking the data in 2014.

Overseas demand for Chinese government bonds has waned as the yuan weakened and yields dropped relative to those of US Treasuries, which have risen as the Federal Reserve has raised interest rates to combat inflation.

China’s benchmark 10-year yield rose eight basis points in June, its biggest jump since October, on the back of a record supply of government debt and tighter liquidity. Similar-maturity US yields jumped 169 basis points in the same period as the Fed hiked rates by 75 basis points and signaled the possibility of a similar increase for July.

Also weighing on the appeal of Chinese debt is the country’s potential plan to boost its fiscal stimulus as it copes with Covid lockdowns and a property slump. That would entail the unprecedented issuance of 1.5 trillion yuan of special bonds for the rest of 2022 and add to existing yuan-debt supply.

Chinese bond investors may find some relief, with the central bank committing to keeping liquidity conditions ample amid growth headwinds stemming from the turmoil in the nation’s property sector. At the same time, the risk of renewed Covid lockdowns may provide support to sovereign bonds.

By the end of June, foreign investors’ holdings of Chinese bonds — both government and corporate — shrunk to 3.64 trillion yuan or 2.6% of the total market versus 3.1% in January, according to central bank data.

The outflows come as China’s economy grows at its slowest pace since the coronavirus outbreak two years ago. Second-quarter growth was 0.4% from a year earlier, below the forecast of 1.2% in a Bloomberg survey, making Beijing’s growth target for the year increasingly unattainable.

Source : BNN Bloomberg

Chart: Global Gold Reserve vs. Global US Treasury in June 2022

Source : Bloomberg

Chart: Total Return in US$ of Selected Government Bonds and Gold Since May 2021

Developed economy government bonds have proved anything but safe.

Source : Gavekal

Charts: Austria 100-year 2.1% Bonds of 2117 Sold Below Offered Yield

Negative- yielding bonds are fast shrinking.

Source : Bloomberg

Read also at FT

Negative-yielding debt total tumbles to $10tn as bond prices drop . . . . .

Chart: 15 Up Cycles of the 10-Year Treasury Yield

See large image . . . . . .

Source : 22V Research

Chart: Differentials Between China’s Government Yield and U.S. Treasuries Reversed

Source : Bloomberg

Charts: Chinese Junk Bond Losses Continue

Source : Bloomberg

What Does a Bond Bear Market Look Like?

Ben Carlson wrote . . . . . . . . .

There have basically only been three long-term bond market cycles over the past 100 years or so for U.S. government bonds.

The first cycle from 1920-1959 was rangebound interest rates from around 2% to 4%. That happened from a combination of deflation following the Great Depression and a cap on rates to help fund World War II in the 1940s.

Inflation picked up in the 1960s and rates followed its lead. Prices spike even higher in the 1970s and inflation didn’t let up until the Fed raised rates to more than 20% by the early-1980s. That bear market lasted more than 20 years.

The disinflationary period that followed is likely the most impressive bond bull market of all-time and won’t be duplicated. There have been a number of spikes along the way but the trend in interest rates has been down for 40+ years.

They are now rising again with the 10 year going from a low of 0.5% in the summer of 2020 to 2.5% now.

Is this the end? Is the four-decade bond bull market over? Should investors prepare for a bear market in bonds?

I’m not smart enough to know these answers but I thought it would be helpful to look at what happened the last time bonds were in a sustained rising rate environment.

The first thing to understand is bear markets in bonds are nothing like bear markets in stocks. This is because bond returns are generally guided by math while stock market returns are guided by emotions.

The best way to predict future returns in the bond market is to start with the current interest rate. This chart from a Fortune piece I wrote is a few years old but the relationship still holds:

Movements in interest rates can cause short-term volatility in bonds but over the long haul starting interest rate levels win out.

The 5 year U.S. Treasury is currently yielding 2.5%. If you invest in intermediate bonds your returns are likely going to be pretty close to 2.5% annually over the next 5 years.

But what about rising rates, Ben?!

Let’s take a stroll down yield lane and look at what happened during the last bond bear market.

These were the annual returns from 1960-1981 for long-term and intermediate-term bonds:

  • Long-term government bonds +3.0%
  • 5 year government bonds +5.4%

Those returns look pretty darn good for a period in which the 5 year treasury yield went from roughly 3% to more than 16%.

The reason for these decent nominal returns is it took more than 20 years for yields to climb from 3% to 16%. And eventually, those rising yields helped offset some of the short-term price losses.

There were, of course, some drawdowns in the short-term from the massive move higher in yields. These were the worst 1, 3, and 5 year total returns from 1960-1981:

The losses here don’t look so bad when you consider the gigantic rise in rates in this time frame but long-term bonds certainly took it on the chin.

Unfortunately, inflation was 5.3% per year over this 22 year period. So intermediate-term government bonds had positive returns by the skin of their teeth while long-term government bonds got shellacked by inflation.

It is worth noting, yields were much higher heading into 1960 than they were from the bottom in rates this time around. We have never seen yields as low as they were at the height of the pandemic market upheaval.

In fact, if we look at the current drawdown in long-term bonds, it’s much worse than anything we saw during the bond bear market of the 1960s and 1970s:

Intermediate bonds are in the midst of their own drawdown as well.

It doesn’t feel like it now but, eventually, higher yields are a good thing.

Going into 1977, the 10 year treasury was yielding roughly 7%. By the end of 1981, yields were just shy of 14%. Since there is a converse relationship between yields and prices, bonds must have gotten crushed right?

Well it wasn’t a great run for bonds but returns were better than you would think from a doubling of interest rates to a ridiculously high level.

Interest rates rose more than 7% in 5 years but 10 year treasuries were actually up more than 6% in total (a little over 1% per year) in this time.

Of course, inflation was running at nearly 10% per year over the same timeframe so real returns were seriously in the negative.

This is the most important point to understand about bonds — inflation is a far greater bigger risk than rising rates.

Rising rates can sting over the short-term but lead to higher returns in the long run.

The biggest risk to a fixed income investor is higher inflation because it eats into your periodic cash payments over time.

I’m not suggesting we’re heading for another 1960-1981-like bond bear market. It’s always possible but predicting the path of interest rates is exceedingly difficult.

You could talk me into rates going much, much higher in this cycle or yields staying rangebound for years to come.

However, it is important to understand the dynamics at play in a bond bear market since there isn’t much precedent for one.

U.S. government bonds don’t necessarily crash like the stock market since the starting yield is the best approximation of your long-term returns in fixed income.

If you’re a long-term investor who utilizes bonds in their portfolio you should want rates to rise. It’s a good thing in the long run.

You just need some patience in the short run to get there.

Source : A Wealth of Common Sense

Explainer: U.S. Yield Curve Inversion – What Is It Telling Us?

David Randall, Davide Barbuscia and Saqib Iqbal Ahmed wrote . . . . . . . . .

The U.S. Treasury yield curve inverted on Tuesday for the first time since 2019, as investors priced in an aggressive rate-hiking plan by the Federal Reserve as it attempts to bring inflation down from 40-year highs.

Here is a quick primer explaining what a steep, flat or inverted yield curve means and how it has in the past predicted recession, and what it might be signaling now.


The U.S. Treasury finances federal government budget obligations by issuing various forms of debt. The $23 trillion Treasury market includes Treasury bills with maturities from one month out to one year, notes from two years to 10 years, as well as 20- and 30-year bonds.

The yield curve plots the yield of all Treasury securities.

Typically, the curve slopes upwards because investors expect more compensation for taking on the risk that rising inflation will lower the expected return from owning longer-dated bonds. That means a 10-year note typically yields more than a two-year note because it has a longer duration. Yields move inversely to prices.

A steepening curve typically signals expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean the opposite: investors expect rate hikes in the near term and have lost confidence in the economy’s growth outlook.


Investors watch parts of the yield curve as recession indicators, primarily the spread between the yield on three-month Treasury bills and 10-year notes and the U.S. two-year to 10-year (2/10) curve .

On Tuesday, the 2/10 part of the curve inverted, meaning yields on the 2-year Treasury were actually higher than the 10-year Treasury. That is a warning light to investors that a recession could follow.

The U.S. curve has inverted before each recession since 1955, with a recession following between six and 24 months, according to a 2018 report by researchers at the Federal Reserve Bank of San Francisco. It offered a false signal just once in that time.

According to Anu Gaggar, Global Investment Strategist for Commonwealth Financial Network, who looked at the 2/10 part of the curve, there have been 28 instances since 1900 where the yield curve has inverted; in 22 of these episodes, a recession has followed. The lag between curve inversion and the start of a recession has averaged about 22 months but has ranged from 6 to 36 months for the last six recessions, she wrote.

The last time the 2/10 part of the yield curve inverted was in 2019. The following year, the United States entered a recession – albeit one caused by the global pandemic.


Yields of short-term U.S. government debt have been rising quickly this year, reflecting expectations of a series of rate hikes by the U.S. Federal Reserve, while longer-dated government bond yields have moved at a slower pace amid concerns policy tightening may hurt the economy.

As a result, the shape of the Treasury yield curve has been generally flattening and in some cases inverting.

Other parts of the yield curve have also inverted, including the spread between five- and 30-year U.S. Treasury yields , which this week moved below zero for the first time since February 2006, according to Refinitiv data.


Still, another closely monitored part of the curve has been giving off a different signal: The spread between the yield on three-month Treasury bills and 10-year notes this month has been widening , causing some to doubt a recession is imminent.

Meanwhile, the two-year/10-year yield curve has technical issues, and not everyone is convinced the flattening curve is telling the true story. They say the Fed’s bond buying program of the last two years has resulted in an undervalued U.S. 10-year yield that will rise when the central bank starts shrinking its balance sheet, steepening the curve. read more

Researchers at the Fed, meanwhile, put out a paper on March 25 that suggested the predictive power of the spreads between 2 and 10-year Treasuries to signal a coming recession is “probably spurious,” and suggested a better herald of a coming economic slowdown is the spread of Treasuries with maturities of less than 2 years.


While rate increases can be a weapon against inflation, they can also slow economic growth by increasing the cost of borrowing for everything from mortgages to car loans.

Aside from signals it may flash on the economy, the shape of the yield curve has ramifications for consumers and business.

When short-term rates increase, U.S. banks tend to raise their benchmark rates for a wide range of consumer and commercial loans, including small business loans and credit cards, making borrowing more expensive for consumers. Mortgage rates also rise.

When the yield curve steepens, banks are able to borrow money at lower interest rates and lend at higher interest rates. Conversely, when the curve is flatter they find their margins squeezed, which may deter lending.

Source : Reuters

Charts: 10-year JGB Yield Climbed to 6-year High

Source : Bloomberg and Trading Economics