By Patturaja Murugaboopathy and Gaurav Dogra
May 23 (Reuters) – Foreign funds that invest in Chinese yuan-denominated bonds posted record weekly outflows last week, indicating an acceleration in selling by foreigners as U.S. bond yields rise and the yuan weakens.
Foreign mutual funds and exchange-traded funds that invest in Chinese yuan-denominated bonds saw net sales of $2.3 billion in the week ending May 18, according to Refinitiv Lipper, the release highest weekly on record.
Foreign investors have aggressively sold Chinese yuan-denominated bonds over the past three months, reducing their total holdings to $558 billion at the end of April, down 2.8% from March.
Ashish Agrawal, head of macro strategy for emerging markets in Asia, estimated the foreign outflow of Chinese bonds at around $10 billion in May.
“Active foreign investors may continue to reduce their exposure, with duration and FX yields less of a determinant as rising global yields offer other carry alternatives,” he said.
However, he does not expect this pace to be sustained in the second half of the year, as the bulk of holdings reflect demand from reserve managers, sovereign wealth funds and indices.
The iShares China CNY Bond UCITS ETF USD (Acc) CYBA.AS recorded net sales worth $553 million in the week to May 18, while iShares China CNY Govt Bond UCITS ETF USD (Dist) and HSBC China Government Local Bond Index ZQ LP68540656 The fund recorded outflows of $396 million and $266 million respectively.
At the start of the year, Chinese 10-year government bonds offered a solid 1.1 percentage point yield premium over US 10-year government bonds. However, this premium has evaporated in recent months, thanks to the US Federal Reserve’s aggressive interest rate hikes and its tough stance on tackling soaring inflation. US10CN10=RR
Chinese 10-year bonds are now yielding slightly less than their US counterparts.
The Chinese yuan has also fallen around 4.5% so far this year against a high-flying dollar, hit by worries about slowing economic growth that have been exacerbated by widespread strict lockdowns aimed at curbing the spread of COVID-19.
Late last week, China cut its 5-year prime lending rate (LPR) much more than expected in an effort to boost the housing sector, but kept its 1-year LPR unchanged.
“The intact 1-year LPR fixation showed that China is still concerned about the impact of the inverted yield differential between China and the United States and the uncertain inflation outlook,” OCBC said in a note on Monday. .
“Given that the Fed is expected to proceed with another 100 basis point rate hike in June and July, the outflow (of Chinese bonds) may continue for some time, in line with other emerging markets.”
Flows to overseas Chinese bond fundshttps://tmsnrt.rs/3sR4AVA
The biggest money outflows from Chinese bond funds overseashttps://tmsnrt.rs/3GdFbe7
10-year Chinese and US government benchmark returnshttps://tmsnrt.rs/3NuRpBD
(Reporting by Patturaja Murugaboopathy and Gaurav Dogra in Bengaluru Editing by Andrew Galbraith and Mark Potter)
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