China’s First Negative-Yield Bond Finds Strong Demand For 4 Billion Euro Issue

 | Nov 24, 2020 10:03

China's euro-denominated bond issue last Wednesday met with strong demand, getting €18 billion in orders for the €4 billion bond sale as it priced the 5-year tranche for a negative yield for the first time.

As the only major economy forecast to grow this year amid the COVID-19 pandemic, China has been tapping international markets more often, catering to investor demand for exposure to its economy. Forecasts put China’s GDP growth at about 1.9-2% this year.

h2 Diversification Away From The USD/h2

Beijing came out with its first euro-denominated bond last year, raising €4 billion. Last month, it sold $6 billion of bonds, bringing its total dollar borrowings over the past four years to $27 billion. But the euro issues play a crucial role as China seeks to diversify its borrowing away from the US dollar.

In last week’s sale, the €750 million in five-year notes was priced to yield minus 0.15%, which may seem low, but it’s a better yield than the minus 0.75% on five-year German bonds.

China had been skittish about negative yields but bankers say they worked hard to educate officials. European investors, for their part, are all too familiar with the phenomenon.

The €2 billion 10-year bond last week as well as the €1.25 billion 15-year tranche had positive yields, coming it at 0.318% and 0.664% respectively.

The five and 10-year tranches went primarily to central banks and sovereign wealth funds, according to reports. The 15-year bonds were bought largely by asset managers, pension funds and insurers.

Foreigners have also been snapping up China’s yuan-denominated debt, especially as major indices have started including the bonds. Foreign holdings of Chinese bonds are about 3 trillion yuan, equivalent to nearly $460 billion.

China’s finance ministry was certainly not averse to taking advantage of the low euro interest rates.