(Bloomberg) -- Foreign investors ramped up holdings of short-term bonds issued by Chinese banks to a fresh record, as attractive rates for swapping dollars continue to juice the returns available on such debt.
Overseas institutions’ outstanding holdings of Chinese negotiable certificates of deposits reached 972.6 billion yuan ($133.7 billion) in June, according to Shanghai Clearing House data. That made up 22.5% of their overall China bond holdings in the month, according to central bank data Friday.
NCDs, short-term debt sold by banks with maturities of up to a year have been a popular home for overseas investors looking to park the premium they get in swapping foreign currencies into yuan in the onshore market. In contrast, global funds cut their holdings of China sovereign debt by 28.1 billion yuan in June, data from ChinaBond website show.
Low yuan borrowing costs in the onshore market and cheap foreign-exchange hedging costs have driven the interest in NCDs, according to Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking Corp. in Singapore.
“This window of opportunity has not closed yet, but investor positions are likely heavy which may slow additional flows going forward,” she said.
While yields on one-year NCDs from Chinese banks with AAA credit ratings have fallen to just under 2%, overseas buyers get a sweetener from onshore traders paying to swap their yuan for dollars, bringing their expected yield to about 6%, according to data compiled by Bloomberg. That’s an attractive proposition given equivalent T-bills have fallen back to around 4.9%.
--With assistance from Ran Li.
©2024 Bloomberg L.P.
