In our view, we believe that a renminbi short-duration bond strategy can offer investors a powerful blend of yields higher than those on comparable fixed-income issues, potential currency gains and diversification benefits. It provides access to an asset class suitable for investors concerned about the possible fallout from tightening US monetary policy.
Looking at yields, short-dated offshore renminbi bonds can offer investors an additional 150bp-200bp relative to similarly-rated government bonds from major markets such as the US, Japan, the UK and Germany. Corporate issues can offer a similar yield pick-up relative to bonds from the same issuer in other currencies. Usually, investors have to accept a lower credit quality or opt for a longer duration in return for a higher yield, but in the case of offshore renminbi bonds, about 85% are investment-grade, they generally have a short-duration profile and they still offer a yield pick-up.
We believe that being positioned in shorter maturities is a good way to reduce risk in a rising interest-rate environment, as such bonds should be less rate-sensitive than long-dated issues. Also, this market is fairly insensitive to external influences, as is clear from the historically low correlation with foreign monetary policy. The tightening of the US Federal Reserve’s monetary policy has had little effect on rates in this market. This insensitivity reduces interest-rate risk and can be seen as a further cushion for investors should volatility rise.