Geopolitical conflicts impact: Chinese USD bonds and high-yield bond indices see zero growth for the year.

AI Inquiry · How Middle East Geopolitical Conflicts Are Driving Up U.S. Treasury Yields and Impacting Chinese USD Bonds

Cailian Press, March 23 (Editor: Yang Bin) Recently, the Chinese USD bond market has experienced significant adjustments due to the continuous rise in U.S. Treasury yields. Particularly, the Chinese USD high-yield bond index and real estate bond index have fallen sharply, erasing last year’s positive returns. Institutions believe that Chinese USD bonds cannot fully avoid the upward movement of U.S. Treasury yields, with limited capital gains potential. Investors pursuing higher yields at lower credit qualities should remain cautious.

Wind data shows that the Markit iBoxx Asia Chinese USD Bond Index declined by 0.37% last week, a notable adjustment. Compared to investment-grade Chinese USD bonds, high-yield bonds saw larger declines. Last week, the iBoxx Chinese USD Investment Grade Bond Index fell by 0.23%, while the high-yield bond index dropped by 1.66%, turning the year-to-date performance negative.

Chart: Markit iBoxx Asia Chinese USD High-Yield Bond Index Trend

(Source: Wind Data, Cailian Press compilation)

Since March, U.S. Treasury yields have risen alongside escalating tensions in the Middle East and the outbreak of conflicts between the U.S. and Iran. Currently, the 10-year U.S. Treasury yield has exceeded 4.40%, up more than 40 basis points since the end of February.

Industrial Securities fixed income analyst Zuo Dayong pointed out that recently, Chinese USD bonds have been under pressure as U.S. Treasury yields rise. The main driver of the yield increase has shifted to geopolitical factors—escalating Middle East tensions pushing up oil prices, further dampening expectations for Federal Reserve easing.

Despite weak non-farm payroll data in February, the long-term outlook for U.S.-Iran conflicts and rising oil prices have restrained inflation fears, making rate cuts less likely. Market expectations for rate cuts have been pushed back from June to July and later.

Research from China Securities PENGYUAN suggests that although China’s own risk resistance and exchange rate stabilization mechanisms can partially offset the impact of rising U.S. Treasury yields, Chinese USD bonds cannot completely insulate from external financial tightening. Investment-grade bonds offer some defensive qualities but are still susceptible to valuation shocks from rising yields. High-yield bonds may show increased internal differentiation, with limited opportunities and higher risks.

Looking at different sectors, Chinese USD real estate bonds have experienced larger declines recently, while municipal and financial USD bonds have been relatively stable. Wind data shows that the iBoxx Chinese USD Real Estate Bond Index fell by 3.32% last week, while the financial bond index declined by only 0.07%, and municipal bonds slightly increased by 0.06%.

Chart: iBoxx Chinese USD Real Estate Bond Index Trend

(Source: Wind Data, Cailian Press compilation)

Recently, there have been no significant negative news about property developers, but real estate USD bonds, especially those with Hong Kong backgrounds, have performed poorly. According to Jiudu Financial, in early March, yields on bonds such as Nanfeng International Holdings NANFUN 5 PERP, Hysan Development HYSAN 3.55 06/16/35, and Swire Properties SWIRE 4.625 08/28/32 increased by approximately 16bps, 31bps, and 36bps respectively. Yields on bonds like China Overseas Development CHIOLI 6.375 10/29/43, CHIOLI 5.35 11/15/42, and CHIOLI 6.45 06/11/34 rose by over 18bps. China Jinmao CHJMAO 3.2 04/09/26 saw yields increase by more than 65bps.

CITIC Securities FICC Chief Ming Ming believes that current defaults among Chinese USD bonds are still mainly concentrated in the real estate sector. Under the debt resolution background, the safety margins of overseas municipal bonds are relatively high, and high-risk property companies are gradually exiting the Chinese USD bond market, making tail risks more controllable. Investors can focus on high-yield municipal bonds with attractive coupons, as well as medium- to long-term AMC and perpetual corporate bonds.

Zuo Dayong recommends that Chinese USD bond allocations continue to prioritize yield strategies. When pursuing higher yields at lower credit qualities, caution is still necessary. Given the uncertain outlook of Middle East tensions, future U.S. Treasury pricing faces multiple uncertainties, with limited room for yields to decline and limited capital gains potential.