Call KBND for opportunities in the Chinese bond market

Emerging market bonds held steady in 2022 as the US dollar and interest rates rose, but the asset class is seen as a potential candidate for a rebound in 2023 as some emerging market central banks pull back from raising interest rates as inflation cools. Predictably, China figures heavily in the emerging market debt debate.

With some fixed-income observers noting that last year’s problems, including problems in the real estate sector, are in the rearview mirror, exchange-traded funds such as KraneShares Bloomberg China Bond Include Index ETF (KBND) could be worth a grade this year.

KBND tracks the Bloomberg China Inclusion Focused Bond Index and primarily holds Chinese government debt as well as investment-grade corporate bonds, indicating relatively tame credit risk compared to other emerging market corporate bond ETFs. Speaking of credit risk, it remains a focus for portfolio managers this year.

“For 2023, we expect total returns to be in double-digit territory and driven by the opening of China and the reversal of austerity policies there.” Again, from both a macro and micro point of view, the outlook faces uncertainties,” noted BNP Paribas, head of emerging markets corporate debt. Alaa Bushehri. “These are around the themes of inflation, recession risk, rates, geopolitics and credit event risk, whether it’s a single name or a sector or a region.” We place a very low probability on credit event risk. But we are in EM corporations and that is an aspect we always have to look at.”

As of the end of 2022, KBND held 35 bonds and had a 30-day SEC yield of 1.95%. It is not particularly high, but it can be concluded that it is a confirmation of quality. In addition, the KBND provides access to China’s $13 trillion bond market, which is increasingly liberalized for international investors.

Not only is the CBND a story of access, but also a shorter duration with the potential for more accommodative monetary policy as China looks to stimulate the world’s second-largest economy against a backdrop of slower global growth.

“So the benchmark for EM companies is now shorter by about two years, but it’s better in terms of ratings: it’s investment grade.” EM sovereigns are high yielding. Having said that, if we look at relative value, we ended 2022 with slightly better performing companies,” Bushehri concluded.

For more news, information and analysis visit China Insights Channel.

The opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. The information on this site should not be used or construed as an offer to sell, solicitation of an offer to buy or a recommendation for any product.

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