Government Bonds | Image: Republic
Chinese bond market: Chinese investors are increasingly turning to convertible bonds amid historically low yields in the domestic debt market and uncertainty surrounding equities, believing such hybrid instruments to be an attractive compromise in the current financial landscape.
Bond yields on yuan-denominated government and corporate bonds have seen significant declines over the past year, driven by expectations of monetary stimulus to support a slowing economy, which has also weighed on the stock market.
The flight to safety in bonds has pushed 10-year yields down more than 30 basis points (bps) this year, marking their lowest levels in more than two decades.
As a result, some bond investors are shifting their attention to convertible bonds, which are relatively attractively priced for potential conversion to stocks while still offering a coupon like regular bonds.
Convertible bonds, being hybrid securities, have an option to convert into shares of the issuing company, which generally results in lower returns than traditional bonds.
LSEG data indicates that around 30 percent of domestic convertible bonds offer yields to maturity above 2.5 percent, which is equivalent to the current trading level of three-year AA-rated corporate bonds.
Analysts attribute this appeal in part to limited demand from pension funds and other institutional investors, which helps maintain the accessibility and high yields of convertible bonds.
Wei Li, portfolio manager at BNP Paribas Asset Management, said: “The risk-reward ratio of convertible bonds is currently at its highest level since 2021. Median bond prices have increased slightly, while premium rates are increasing. are significantly compressed, indicating an improvement in bond prices. properties.”
As the continent’s traditional sources of high-yielding assets, such as real estate bonds and local government financing vehicle (LGFV) bonds, face regulatory constraints, investors are increasingly viewing convertible bonds as viable alternatives.
By holding convertible bonds, investors will also benefit from a stock market rebound.
Su Jiangning, senior product manager at Shanghai Hesheng Assets Management, commented: “We have recently increased our convertible bond holdings. Straight bond yields have fallen across the board, so the yield on convertible bonds may be more attractive due to the low valuation of the embedded option. Some implicit option values are even close to zero. »
While the CSI convertible index has remained relatively stable this year, slightly underperforming the blue-chip CSI300 index, Xia Huadong, director of institutional affairs at Riturn Asset Management in Shanghai, believes some low-rated convertible bonds present opportunities interesting.
“Our strategy is to select convertible bonds that have both low pricing and premium rates, providing these securities with greater room for future price appreciation,” he explained.
(With contributions from Reuters.)