Geopolitical conflicts impact: Chinese USD-denominated high-yield bond index's annual gains return to zero

AI Questions · How Middle East Geopolitical Conflicts Are Driving Up U.S. Treasury Yields and Impacting Chinese USD Bonds

Cailian Press, March 23 (Editor: Yang Bin) Recently, due to the continuous rise in U.S. Treasury yields, the Chinese USD bond market has experienced significant adjustments. Notably, the Chinese USD high-yield bond index and real estate bond index have fallen sharply, erasing gains made earlier this year. Institutions believe that Chinese USD bonds cannot fully avoid the upward movement of U.S. Treasury yields, with limited room for capital gains. When seeking higher yields through lower-quality assets, investors should remain cautious.

Wind data shows that the Markit iBoxx Asia Chinese USD Bond Index declined by 0.37% last week, with a notable adjustment. Compared to investment-grade Chinese USD bonds, high-yield bonds experienced a larger decline. Last week, the iBoxx Chinese USD Investment Grade Bond Index fell by 0.23%, while the high-yield bond index dropped by 1.66%, turning the year-to-date performance negative.

Chart: Performance of the Markit iBoxx Asia Chinese USD High-Yield Bond Index

(Source: Wind Data, Cailian Press compilation)

Since March, U.S. Treasury yields have risen amid escalating U.S.-Iran tensions and increasing Middle East instability. As of the latest data, the 10-year U.S. Treasury yield has exceeded 4.40%, up more than 40 basis points since the end of February.

CICC Fixed Income Analyst Zuo Dayong pointed out that recently, Chinese USD bonds have been under pressure as U.S. Treasury yields rise. The main driver of the yield increase has shifted to geopolitical factors—escalating Middle East tensions pushing up oil prices, further dampening expectations for Federal Reserve easing.

Despite weak non-farm payroll data in February, the long-term outlook for U.S.-Iran conflict and rising oil prices have kept inflation concerns alive, significantly delaying rate cuts. Market expectations for rate cuts have been pushed back from June to July and later.

Research from China Securities and Pengyuan suggests that although China’s own risk resistance and exchange rate stabilization mechanisms can partially offset the impact of rising U.S. Treasury yields, Chinese USD bonds cannot completely shield against the tightening of external financial conditions. Investment-grade bonds have some defensive qualities but are still vulnerable to valuation shocks from rising yields. High-yield bonds may show increased internal differentiation, with limited opportunities but higher risks.

Looking at different sectors, Chinese USD real estate bonds have experienced larger declines recently, while municipal and financial USD bonds have been relatively stable. Wind data shows that the iBoxx Chinese USD Real Estate Bond Index fell by 3.32% last week, while the financial bond index declined by only 0.07%, and municipal bonds slightly increased by 0.06%.

Chart: Performance of the iBoxx Chinese USD Real Estate Bond Index

(Source: Wind Data, Cailian Press compilation)

Recently, there have been no significant negative news about property developers, but their USD bonds, especially those with Hong Kong backgrounds, have performed poorly. According to Jiudu Financial, in early March, yields on bonds such as Nanfeng International Holdings NANFUN 5 PERP, Hysan Development HYSAN 3.55 06/16/35, and Swire Properties SWIRE 4.625 08/28/32 increased by approximately 16bps, 31bps, and 36bps respectively. Yields on bonds like China Overseas Development CHIOLI 6.375 10/29/43, CHIOLI 5.35 11/15/42, and CHIOLI 6.45 06/11/34 rose by over 18bps. China Jinmao CHJMAO 3.2 04/09/26 saw yields increase by more than 65bps.

CITIC Securities FICC Chief Ming Ming believes that current defaults among Chinese USD bonds are still mainly concentrated in the real estate sector. Under the debt resolution background, the safety margins of overseas municipal bonds are relatively high, and high-risk property companies are gradually exiting the Chinese USD bond market, making tail risks more controllable. Investors can focus on high-yield municipal bonds with supply, as well as medium- to long-term AMC bonds and perpetual corporate bonds.

Zuo Dayong recommends that allocation of Chinese USD bonds should continue prioritizing yield strategies. When seeking higher yields through lower-quality assets, caution remains essential. Given the uncertain trajectory of Middle East tensions, future pricing of U.S. Treasuries faces multiple uncertainties. The space for yields to decline further is limited, and capital gains opportunities are relatively constrained.

(Cailian Press, Yang Bin)