Chinese Bonds Offer Solid Returns

Chinese Bonds Offer Solid Returns

over 3 years ago2 mins

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The six-month gap between US stocks’ last and latest record highs may end up being worth the wait for investors – but with American bond returns gone through the floor, those seeking to build a balanced portfolio may want to check out China… 🇨🇳

What does this mean?

The S&P 500 index of US stocks closed at a new record high last week – 181 days and one pandemic since the last such milestone. And while past performance is no guaranteed guide to future results, American stocks’ history suggests that this relative rarefaction between peaks could be a good thing. When the S&P 500 waits more than five months for a new high, the subsequent one, three, six, and 12 months typically deliver higher-than-average returns.

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As every Finimizer knows, stocks form just a part of the well-tempered portfolio. That being said, most investors’ other principal assets – income-producing bonds – aren’t providing particularly good yields at present. Once you factor in inflation, “real” yields for many government bonds in developed economies, including the US, are negative – and only getting more so.

That’s normally a sign that investors are pessimistic about future economic growth. Yet at the same time prices of American Treasury Inflation-Protected Securities (TIPS) indicate that inflation expectations are rising – which usually happens when an economy is overheating. This dichotomy may be due to investors’ belief that the US central bank could cap interest rates on long-term bonds. Whatever the reason, however, it's encouraging a hunt for returns elsewhere… 👀

Why should I care?

While it still makes sense to keep some money in “risk-free” government bonds – especially as yields may well fall further – big brokerage Charles Schwab recommends investors respond to US government bonds’ negativity by moving some of their holdings into TIPS – as well as looking at the larger returns offered by bonds in corporate and emerging markets.

That’s a view shared by Julius Baer. The Swiss private bank last week pointed to China’s growing independence from US central bank policies – and influence over other Asian economies – as reasons for investors to check out not just the country’s stocks but its government bonds, either on their own or as part of a growing number of bond indexes 🗂

Chinese bonds, after all, currently offer significantly better returns than their US and European counterparts. Still, States-based investors should crunch the numbers before jumping in; the dollar’s declining international value – a symptom of those sub-zero real American yields – might make buying Chinese bonds more expensive…

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