(Bloomberg) — Bearishness among foreign investors toward China’s bonds is easing after last year’s rout, with Pacific Investment Management Co. becoming the latest to warm up to the debt.
“We have turned neutral on China bonds for a number of weeks now, compared with an underweight bias at the beginning of the year,” said Stephen Chang, a portfolio manager at Pimco. “Data continue to show the Chinese economy losing momentum and the current monetary policy justifies a more neutral stance for us on duration.” Easing depreciation pressure on the yuan is also supportive, he added.
After a record exodus last year, global funds have started returning to Chinese bonds since May as bets for US interest rates to soon peak and Beijing’s monetary easing boost demand. But optimism has yet to fully take hold, with pricey valuations, a wide US-China yield gap and uncertainties over the yuan’s outlook deterring some investors.
It may take some time for sentiment toward China’s economy to recover completely, even after the Politburo, the country’s top decision-making body, adopted a supportive stance toward the private sector and housing market at its latest meeting, Chang said.
“It’s a matter of where those policies will come through — not only in terms of the exact measures, but also in terms of the timing of when they might become helpful,” he said. “While there is that desire to support growth for it to go back up as the Politburo signaled, the type of measures might be more difficult to implement this time around.”
The probability is also low for a meaningful rebound in Chinese property bonds. “Many Chinese developers will be facing maturity coming through in the next 6 to 12 months and their ability to meet timely payment of those bonds remains vulnerable,” Chang said.
Pimco is holding more of a neutral view on developers’ dollar notes, until industry support measures lead to a pickup in actual home purchases that would improve companies’ cash flows and credit profiles, he said.
While China’s economic fundamentals and policy direction bode well for its local-currency debt, the nation’s sovereign bonds remain expensive on a valuation basis, reducing its appeal relative to other government bond markets, according to Chang.
China’s yield curve is likely to steepen as potential further easing measures pressure the front end while extra bond supply points to lower conviction on longer tenors, he said.
The 10-year government bond yield has fallen since February and touched the lowest in almost a year this month.
Here are some other takeaways from the interview:
There may be quite incremental and modest rate cuts in China in terms of scope, but at least the direction is that the central bank will keep monetary policy accommodative
If the yuan were to stabilize and maybe even turn around from the recent depreciation, that may be a potential supportive factor for allocation to China bonds. The recent yuan fixings indicate that the PBOC may not want to see additional weakness. The CFETS Index for the currency may stabilize at current levels after the pullback this year
In Asia, Pimco is overweight South Korea due to the country’s preemptive rate hikes and stabilizing inflation; underweight Malaysia where rate hikes have been slow compared to other economies
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
