(Bloomberg) -- Chinese sovereign bonds have become more attractive due to their improving valuations and lower volatility than many global peers, according to two of the largest UK money managers.

Abrdn Plc is considering purchasing Chinese debt after selling out three months ago, as rising yields have made the securities more appealing. The relative stability of the bonds and the outperforming yuan are two reasons for investors to buy, according to M&G Investments Plc.

China’s government securities were on track to lose 8.5% this year, based on a Bloomberg total return index, but that’s better than a US Treasuries gauge down 15% and a 26% slide in a UK gilt equivalent. Part of their outperformance has been due to the relatively dovish monetary policy of the People’s Bank of China as it seeks to bolster the faltering economy.

“With yields backing up lately, we are again looking for a re-entry,” said Louis Luo, multi-asset investment director at abrdn in Hong Kong. Any further selloff would be an opportunity to add positions in the five-to-10-year part of the curve, which will benefit if the medium-term growth outlook is revised down, he said.

Chinese bonds look more attractive than Treasuries as investors can get extra yield even after taking on currency hedges and investors won’t be fighting the central bank, he added. An estimate of the gap between benchmark Treasuries and an equivalent currency-hedged Chinese bond was just under 60 basis points on Friday, according to data compiled by Bloomberg.

Strengthened Case

M&G Investments says the relatively good performance of the yuan is a further positive for investments in the nation’s bonds.

While China’s currency has weakened about 13% this year in the face of a surging dollar, that’s still better than the 17% loss in the pound or the 23% slide in the yen.  

The yuan is outperforming its major peers in the broad dollar move, “hence, for global investors, the case for allocating to China government bonds has been strengthened this year,” said Guan Yi Low, head of fixed income for Asia Pacific at M&G Investments in Singapore.

Overseas funds have started to increase holdings of China’s government bonds again after being net sellers for five months through June. They bought 2.3 billion yuan ($317 million) of the securities in August, after snapping up 3.3 billion yuan in July, according to data from China Central Depository & Clearing Co.

There’s still room for improvement though, as those figures are well short of the 121 billion yuan they bought in January 2021.

‘Winning Bet’

Not everyone is as bullish as the UK fund managers. 

Divergent monetary policy between the US and China will continue to keep the yield gap between the two countries’ bonds wide, limiting their appeal, according to Andy Suen, an emerging-markets fixed-income team portfolio manager at PineBridge Investments.

But for HSBC Holdings Plc., China’s bonds are a “winning bet” due to their diversification qualities.

“I’m still bullish on China governments long term,” said Steven Major, head of fixed-income research at HSBC in Hong Kong. “In a global portfolio, Chinese government bonds are one of the safest places to position, where you can sleep at night.”

©2022 Bloomberg L.P.