Putting your assets into bond markets could be a relatively safe investment, but possibilities that a government is not managing their economy well still exist. Thorough investigations on bond markets of your interest remain important and crucial to avoid losses as much as possible.
Previously, the Panda Bond of China has been talked about, and we promised to bring other bond and securities related information this week. In this article, you will see some basics of the bond markets respectively in the EU, China and Japan.
There is no unified EU bond market, because each European country is responsible for issuing their bonds and managing their bond market. Notably stable bonds are those from Germany. German bond market can be traced back to 1870s, with some considerations that it should be dated back to the Prussian government bonds in the beginning of 18 centuries. After the reunification, the yields of German bonds have been gradually going downwards with relative stability.
German bonds normally come with 10-30 years of maturation, but the return rate is very low, especially when the interest rate has been fixed. Investment on German bonds is a trade of returns for stability. Two months ago, 30-year German bonds were sold with negative yields. Safe and stable investments tend to overweigh high but risky returns in long-term investments.
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The French bond market is quite known for its flexibility in conversion between securities and cash. Therefore, investments in French bonds are quite safe because investors can easily get cash out of their bonds purchased. The potential downside is the excess of debt if majority would get cash out.
The British bond is named “Gilts”, which is also a relatively safe investment to make due to low risk level. Nevertheless, inflation predictions and political stability should be minded when taking government bonds in UK. Italy has a rather larger bond market. It used to be offering many good choices for investors but not as stable as it was before the political turmoil.
China established its bond market in 1870 but the contemporary bond market has its origin in the late 80s. The Shanghai Stock Exchange has come into existence in 1990 and the Shenzhen Stock Exchange in 1991. Two years ago, the Bond Connect has been established to sooth bond transactions between the mainland and Hong Kong markets. Mainland and foreign investors are able to buy and sell as ease in both markets through two mechanisms, namely the North Connect and the South Connect, which are part of the general Bond Connect.
The North Connect has been in operation since July 2017 where Hong Kong investors and foreign investors are able to arrange bond transactions, custody and settlements to further their investments in the mainland bond markets. This new channel witnessed 200 billion RMB of transactions in two years’ time. By mid-2019, the number of foreign investors joined the Bond Connect had doubled to 1038 entities over the number at the end of 2018. 62 of the top 100 asset management companies have been attracted to this transaction channel and 58 have finished listing procedures. Given the success, the South Connect is expected to be opened in the near future.
One of the most active bonds in China is the 10-year bond, which has seen a slow decrease on return to as low as 3% a couple months ago. It is the lowest point since 2016, but this figure remains high compared to general data. The prediction is that the room for further decrease will be limited because China has not planned to lower rates for medium-term lending facilities. In comparison to the world’s majority of negative-yielding bonds, Chinese bonds are quite attractive.
The Japanese government bond (the JGB) market was predominantly filled with around 90% local Japanese entities in about 6 years ago. By the end of the first quarter in 2019, around 40% were foreign funds. More foreign entities grew interested in the Japanese bonds not because of the high yields from easing on interest rate, but because of the benefits to be earned by dollar investors via yen assets in cross-currency basis swaps.
May this information be helpful to you in one way or another. Are you curious about the next topic? Please stay tuned for our next article.
Global Connect Admin B.V. | Xuan Hao
