Nuggets Chinese dollar debt: relatively attractive yield and relatively high investment potential

Since April this year, the most popular investment in the market is the Chinese dollar bond market. The Chinese dollar bond market has risen astonishingly since April. Chinese dollar bonds are less dependent on the external market environment than the stock market, and the long-term performance of Chinese dollar high-yield bonds may even exceed some stock indexes, and the volatility is relatively low, which is a more attractive investment for investors in pursuit of sound returns.

Picture: the long-term performance of Chinese dollar high yield bond index outperforms the Hang Seng China Enterprise Stock Index.

The so-called Chinese dollar bonds, as the name implies, are bonds issued by Chinese institutions in overseas markets but priced in US dollars. Its income is mainly composed of two parts: 1) US dollar benchmark interest rate and 2) credit spread, which reflects the risk of default.

So why are Chinese dollar bonds so popular in the bond market?

• The yield of overseas Chinese dollar bonds is relatively higher than that of domestic ones.

With the same issuer, because of the relative segmentation of the domestic and overseas markets, and because of the differences in rating systems at home and abroad, some Chinese-funded institutions with better domestic qualifications and better ratings have recorded lower ratings abroad, and bond yields are usually higher than those in China. On the contrary, this kind of information asymmetry is beneficial for investors who understand Chinese-funded institutions, creating room for arbitrage.

Income from issuing bonds

• At present, the yield on Chinese dollar bonds is more attractive.

In March this year, due to the epidemic, the Chinese dollar bond market fell out of a "golden pit". On the contrary, many high-quality Chinese dollar bonds were sold because of their good liquidity. These high-quality Chinese dollar debt rebounded sharply and it took less than two months to recover all the lost ground and hit a new high. Chinese high-yield dollar bonds, whose yields have exceeded double digits since March, are still attractive at high single-digit yields.

Figure: the trend of yield and credit spread of Chinese high-yield US dollar bonds (%)

Moreover, as can be seen from the above chart, the yield of Chinese high-yield US dollars and credit spreads are basically stuck together, indicating that the gap between them (that is, risk-free interest rates) is close to zero, and credit spreads are also at a relatively high level. Because the credit spread is one of the decisive factors that determine the yield of Chinese dollar debt, the higher the credit spread, the higher the bond yield.

• Interest rate environmentBenefit and benefit：美元零interest rateHorizontal prediction期Maintain a higherFor a long time

The market expects the Fed to keep interest rates at zero for at least three years, and for the bond market, the lower market interest rates, the more conducive to higher bond prices. In terms of benchmark interest rates, it is undoubtedly a boon for Chinese dollar bonds.

Picture: the Federal Reserve predicts that a zero interest rate environment may remain until 2023

• Low risk of default

In addition, the main body of Chinese dollar bond issuers are mostly composed of well-known enterprises with good qualifications. Moreover, issuing bonds abroad requires the consent of regulatory departments such as the National Development and Reform Commission, which is equivalent to pre-screening the qualifications of enterprises, coupled with the consideration of non-economic factors, so the essence of historyRelative default rate较低From 2015 to 2019, the average default rate of Chinese dollar debt was only 0.18%, while that in Asia was 1.84%, which was lower than that of other emerging market countries such as Eastern Europe and Latin America.

Picture: historical default of Chinese dollar debt

Picture: the default rate of Chinese dollar debt is relatively low.

• Low risk and volatility

Compared with the market representative index, the return investment of Chinese US dollar bonds is higher than that of A shares, Hong Kong stocks and gold in the past decade, while the volatility is lower than that of A shares, Hong Kong stocks and gold. Overall, the risk-adjusted return (Sharp ratio) of Chinese dollar bonds is relatively high.

Picture: comparison of risks and returns of various types of assets around the world since 2010

To sum up, the yield of Chinese dollar bonds is attractive and the investment potential is great, but as a kind of complex securities, it has a certain entry threshold for ordinary investors, and institutional investors are more experienced. Investors can choose dollar bond funds to allocate according to their own energy and ability.

Similar top students, flexible allocation of Dacheng full-income bond fund

Dacheng full-income Bond Fund, as a fund mainly invested in Chinese dollar bonds, was established on September 16, 2019. The types of investment bonds are mainly debt securities issued by governments, government agencies, supranational organizations, banks or international companies.

The Fund has imposed restrictions on the investment of new market trading vouchers, including Hong Kong, mainland China, Japan, South Korea, Australia, Canada, Europe and the United States.

At present, the investment category of the fund is mainly Chinese-funded US dollar high-yield bonds. The fund may invest up to 85% of its net asset value in bonds rated below investment grade or unrated. At the same time, in order to achieve a more balanced asset allocation, the fund must invest at least 15 per cent of its net asset value in bonds rated investment grade or above or AAA or above by Chinese credit rating agencies.

The maturity of the invested bonds is relatively short, and the average duration of the bond portfolio is less than 2 years by the end of August 2020, which can effectively control interest rate risk, and can also hold maturity to avoid the impact of short-term fluctuations in extreme market conditions. add a peace of mind to investors' assets.

In terms of investment strategy, the fund does not make too many restrictions on it and does not set performance benchmarks. Fund managers can flexibly adjust their investment strategies and choose the types of bonds according to the market trend.

In terms of performance, according to Morningstar, as of August 13, 2020, the annual yield of the fund has ranked among the top 10% of the same type of funds (global bonds-flexible strategy), with excellent performance. And in the case of keeping the income better than the same kind of performance, the pullback and volatility are also relatively small and low; in the face of market fluctuations, Dacheng full-income bond fund is one of the relatively stable high-yield dollar bond funds.

And excellent funds can not be separated from excellent investment management team. The core members of Dacheng International's investment team have been engaged in macro and quantitative strategy research in international well-known investment banks for many years and have rich experience in research. The team has managed a number of products with excellent past performance and won numerous honors in the industry. It has won the overseas Taurus Award of China Securities News for two consecutive years in 2018 and 2019, and has been affirmed by professional institutions.

Generally speaking, under the circumstances of global capital turmoil, many major economic entities have entered the stage of interest rate cut. relatively speaking, the yield on Chinese dollar bonds is relatively attractive, and the investment value is prominent. Chinese dollar bonds with expanding scale and high investment potential may be a good investment choice.