Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.
With the US Federal Reserve’s (Fed’s) interest-rate-hiking cycle now underway, it’s an important time to keep a close eye on non-US buyers of US dollar (USD) fixed income securities. Historically, Japanese and European investors have been large participants in the space. But if the Fed continues to raise US rates as expected, the positive carry return1 that these investors have recently reaped from US Treasuries may turn negative because the Fed’s rate hikes will increase the cost of foreign-exchange hedging for non-US investors, particularly in Japan. Indeed, taking account of currency hedging, European fixed income could start to look more attractive than its US counterpart to Japanese buyers.
Figure 1 shows the spread of hedged 10-year US Treasuries versus 10-year Japanese government bonds (JGBs) in light blue and the spread of hedged 10-year German bunds versus 10-year JGBs in dark blue. Both lines use a 12-month currency forward, instead of the more commonly used three-month forward, to better incorporate the…
The Chinese government’s aggressive regulatory crackdown on the country’s private technology companies (most recently, the online education sector) has shaken investor sentiment toward a range of Chinese assets, causing China’s equity and bond markets alike to swoon in recent days. The crackdown comes as Chinese policymakers embark on the delicate balancing act of redefining the role of private enterprise in China, versus the often-competing objectives of the nation’s common prosperity and social responsibility.
Here’s a distillation of our global fixed income and emerging markets debt teams’ latest views on some of the potential investment implications.
China equities and sovereign bonds, along with the Chinese currency, abruptly sold off in unison following the government’s latest regulatory actions during the week of July 26. But most Chinese household wealth is still mainly invested in…
A key pillar of my largely favorable outlook for China, including potential asset-price outperformance, lies in my directional view on the Chinese yuan (CNY). I continue to believe the CNY is likely to appreciate, or at least remain stable, over the next 12 to 18 months and beyond. Indeed, I think one of China’s challenges over the next few years will be how to contain its ongoing currency strength, rather than how to defend against currency weakness.
Here are the five reasons why I’m still bullish on the CNY.
1. China’s relative interest-rate differential is near the top of its historical range and may stay elevated going forward. For example, the spread between China’s 10-year government bond yield and that of the 10-year US Treasury note was recently at a decade-long high. As a result, I expect Chinese fixed income assets to…
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