China has sold its first negative-yielding sovereign bond, a euro-denominated deal that drew bumper demand from European debt investors facing record-low returns across the region.
The offering, which drew in about €18bn worth of orders for €4bn of bonds, is the latest sign that investors are rushing to gain exposure to China as it recovers from the pandemic more quickly than Europe or the US.
The bond sale by China’s finance ministry gave large institutional investors the opportunity to grab higher yields than those available in Europe, where central bank easing to cushion the economic blow of the pandemic has pushed interest rates to record lows.
Yield on the five-year, €750m bond issued by China was priced 0.3 percentage points above the benchmark mid-swap rate of minus 0.45 per cent, offering investors an effective interest rate of minus 0.15 per cent, according to a term sheet seen by the Financial Times.
The rest of the euro-denominated debt offering was composed of a 10-year €2bn bond and a 15-year €1.25bn bond, carrying yields of 0.318 per cent and 0.665 per cent, respectively.
By comparison, the yield on the five-year German Bunds, which are typically seen as a safe haven, hovered around minus 0.74 per cent on Thursday.
“This was a combination of the rarity of issuance alongside a positive outlook for China’s economy,” said Alan Roch, head of bond syndicate in Asia at Standard Chartered, one of the banks on the deal. He added that “From a relative standpoint, when you [as China] issue €4bn . . . you’re far from having filled people’s shoes in terms of demand.”
Sam Fischer, head of China onshore debt capital markets at Deutsche Bank, another bank on the deal, said the strong demand “shows investors are still underexposed to China and there definitely is a scarcity value perceived in these bonds”.
About 72 per cent of investors were from Europe, the Middle East and Africa.
Bankers said the five and 10-year offerings were largely snapped up by central banks and sovereign investment funds, while the 15-year tranche skewed towards European asset managers, insurers and pension funds.
China’s finance ministry had expressed concerns over issuing a negative-yielding bond last year when it issued its first euro-denominated bonds, according to bankers on the deal, but it has since become more comfortable with the concept.
“We did some education in the meantime,” said one banker who worked on both deals. “Issuing at a negative yield doesn’t mean you actually have to have a back-office team that chases investors [for payments], it just means they’re going to pay you up front for the negative portion.”
The latest sovereign issuance from China comes just weeks after Beijing sold $6bn in dollar debt directly to US buyers for the first time in an offering that drew record demand.
Appetite for higher yields has also driven investment flows into China’s onshore bond market, although a recent string of high-profile defaults on domestic bond issues has unsettled some investors.
Edmund Goh, Asia fixed income investment director at Aberdeen Standard Investments, said onshore bonds had sold off in recent weeks. But he added that offshore investors “do not behave the same way”.
“I would say that definitely the investors who bought the euro government bonds won’t be bothered by the rising rates locally,” he said.
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