(Bloomberg) -- China’s domestic investors are abandoning the nation’s equities for the safety of bonds as concerns mount about the deteriorating economic outlook.

Yields on 30-year government securities dropped to the lowest in almost two decades this week, and futures on the notes recorded one of the biggest daily jumps since April 2023. The moves came after the benchmark CSI 300 Index of shares plummeted to a five-year low amid signs of a wider exodus from the world’s second-biggest economy.

The rotation into fixed income is probably led by local investors given that global funds have a modest share of yuan notes, and reflects how money managers continue to scour the battered landscape for pockets of opportunities. Authorities have rolled out a slew of measures — and a $278 billion rescue package may be in the works — but market watchers are skeptical the steps will reverse the downtrend in equities.

“The deepening losses in stocks is spurring extreme risk aversion among local investors, fueling large inflows into the fixed-income products as they seek haven assets,” said Yang Hao, analyst at Nanjing Securities Co. Mutual funds are scooping up long-dated bonds after they received more client subscriptions, while some stock investors may be buying bond futures as a hedge, he added. 

The purchases have been so relentless that the benchmark 10-year sovereign bond yield is approaching the lowest level since 2002.

Bond funds raised 13 times the capital garnered by their equity counterpart in December, according to third-party data collated by China analysis firm Z-ben Advisors Ltd. In the fourth quarter, fresh funds raised by bond vehicles reached the highest since mid-2022 while that of equity funds languished near the lowest level in at least five years, the figures showed.

Funds are flowing into bonds at a time when traders are ramping up bets that the People’s Bank of China will deliver more monetary easing this year.

“Investors are holding on to bets for further monetary easing, mainly through a long position in long-dated bonds,” said Wei Fengling, senior strategist at Pengyang Asset Management Co. “Ultimately, China may need to maintain interest rates low so authorities can defuse local government debt and roll out more fiscal stimulus.”

Following the slump, Chinese stocks are now the cheapest they have ever been versus sovereign bonds, going by the spread between the 10-year bond yield and the CSI 300 Index’s estimated dividend yield, according to Bloomberg’s calculations.

But that has done little to deter funds from plowing money into fixed-income securities. At least five bond fund products closed their subscription earlier than planned this year after they easily met their fund-raising targets, the Securities Times said in report earlier this week. 

“It will take time to restore investor confidence,” said Xu Yongbin, investment director on rate strategy at U-Shine Investment Group. Demand for bonds may remain robust, as investors are opting for stability over higher returns for now, he added.

--With assistance from Qizi Sun and Jing Zhao.

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