Market turmoil will boost bond sector

Bonds in China will benefit from the nation's equity market woes as investors shift more money to debt, analysts said.

The Shanghai Composite Index has plummeted more than 30 percent from its June 12 peak and has kept on plunging even after interest-rate cuts, a wave of trading stoppages and stock purchases by State-directed funds.

Shares still face "great volatility and uncertainty", China International Capital Corp analysts led by Chen Jianheng wrote in a report on Tuesday. "That may result in some investors with lower risk appetites turning to fixed-income products such as banks' wealth management products, money market funds and bond funds."

Monetary easing and risk aversion are spurring a rally in fixed income, with the yield on China's benchmark 10-year government bond dropping 23 basis points from June 15 to 3.44 percent on Tuesday in Shanghai, its lowest since May 25.

The average extra yield offered by local corporate notes compared with the sovereign has fallen 13 basis points from its March high, a Bank of America Merrill Lynch index shows.

Among those pouring money into bonds are initial public offering funds that primarily invest in new shares, banks engaged in rebalancing their investment portfolios and individual investors pulling money out of stocks, according to Ji Weijie, a senior associate at China Securities Co in Beijing.

"The risk-averse sentiment is very strong right now," he said. "That's why we expect a bull run in the bond market to continue. As long as stocks keep declining, the bond market will keep rallying."

IPO funds, which mainly invest in initial share sales through lotteries, are estimated by the CICC to have total assets of about 2 trillion yuan ($322 billion).

With initial share sales in China currently suspended, these sorts of funds are allocating more money to fixed income, especially higher-quality debt, brokerage Industrial Securities Co said in a report on Tuesday.

Zhu Qibing, a Beijing-based macro economy analyst at China Minzu Securities Co, said longer-term bond funds are likely to benefit more because the flattening of the yield curve shows the People's Bank of China intends to cap long-end rates.

"The aggressive stock market rescue package appears to have fueled pessimism over the growth outlook among bond investors," said Frances Cheung, Societe Generale SA's Hong Kong-based head of rates strategy. That is "bullish for bonds", she said.