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Japanese Investors Flock to Chinese Bonds for Higher Yields

This article was originally published on ETFTrends.com.

Japanese investors with an appetite for high yields have been flocking to Chinese bonds in order to appease this hunger as access to these areas of the $12 trillion Chinese bond markets have opened due to recent reforms. Data provided by the Japanese Ministry of Finance revealed that Japanese investors purchased 151 billion yen ($1.33 billion) of Chinese bonds year-to-date, which is close to double the amount invested in 2016.

“A growing number of investors are interested in Chinese bonds now,” said Hiroshi Yokotani, portfolio strategist at State Street Global Advisors. “The biggest attraction is their relatively high yield.”

In addition to the higher yields offered by Chinese bonds, China's latest policy changes have provided the necessary ingress to allow more Japanese investors and investors across the globe to take part in the high-yielding bond bonanza.

“China’s policy stance on markets is becoming very open, which we take very positively. And the speed of their market reforms is quite fast, compared to other countries,” said Koichi Matsumoto, general manager of global fixed income investment.

Adding fuel to the flame is China temporarily eliminating taxes for foreign institutions who are interested in allocating capital into the country’s corporate bond market. However, more access to yuan funds will be necessary in order to fully experience the exponential growth potential that can be realized in the Chinese bond markets.

“We want to expand investments in Chinese bonds as the market size grows. But while we have lots of yen, we need to be mindful of funding in foreign currencies,” said Yasuhiko Sugimoto, general manager of international treasury at Mizuho Bank. “For us, it is vital to have a liquid repo market.”

Related: Bond ETF Investors Are Steering Toward High-Yield

ETF Options for High-Yield

Fixed-income ETFs can offer investors with high-yield exposure, such as the  iShares iBoxx $ High Yield Corp Bd ETF (HYG) , iShares 0-5 Year High Yield Corp Bd ETF (SHYG) and SPDR Blmbg BarclaysST HY Bd ETF (SJNK). With the aforementioned available in an ETF wrapper, it gives investors exposure to high-yield assets without the additional credit risk of direct exposure to the bonds themselves.

HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality. Investors who have been able to forego the credit risk have seen total returns of 5.49% the last three years and 1.96% the past year based on Yahoo! Finance performance figures.

SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index, which is primarily composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. Like SJNK, debt maturities are shorter, thereby helping to hedge some credit risk, but issues are still less than investment-grade. Nonetheless, SHYG has managed to return 2.97% year-to-date, 3.75% the past year and 5.62% the last three years.

SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade. SJNK has returned 3.12% year-to-date, 4.09% the past year and 5.53% the last three years.

According to Sean Hanlon, Chairman, CEO and Chief Investment Officer of Hanlon Investment Management, these high-yielding bonds could be the best defense against more rate hikes to come despite most having below-investment grade debt issues.

"High yield bonds, being below investment grade, tend to be more sensitive to the economic environment, like stocks, than they are to interest rates," said Hanlon, in an article. "The high yield bond market, oddly, has been a bit of a haven this year. Traditionally not seen as such, high yield bonds have provided some insulation from rising interest rates and the strong dollar that are affecting the fixed income market this year."

Hanlon also cited that tax cuts have allowed high-yield debt to flourish as corporate earnings have been elevated. In addition, the steady rate of interest rate hikes has allowed high yield issuers to defer the brunt of the borrowing costs.

For more trends in fixed income, visit the Fixed Income Channel.