Since the outbreak of conflict in Iran, global bond markets have experienced large-scale sell-offs, while Chinese government bonds have defied the trend to become the only safe haven.
Since the conflict began, the yield on China’s 10-year government bond has edged down slightly to 1.82%, while the yield on the U.S. 10-year Treasury note surged 38 basis points to 4.34%, and the yield on U.K. government bonds jumped by 70 basis points.
This divergence indicates that, against a backdrop of soaring energy prices and rising global inflation, investors are viewing Chinese government bonds as a rare safe-haven asset.
Jason Pang, a senior portfolio manager and head of Asian local rates and foreign exchange at J.P. Morgan Asset Management, stated that Chinese government bonds "offer investors like us a low-correlation investment option."
**Energy Structure and Low Inflation Build a Firewall for China’s Bond Market**
The core rationale behind investors favoring Chinese government bonds lies in the Chinese economy’s inherent resilience to the current energy shock.
Unlike most economies in Europe and Asia, which are highly dependent on imported energy, China has a relatively diversified energy mix, with coal and renewable energy playing significant roles. At the same time, China possesses substantial strategic petroleum reserves, which partially shield it from the impact of the energy shock—while neighboring countries such as South Korea, Japan, and Southeast Asian nations face greater pressure.
Mitul Kotecha, head of Asian FX and emerging markets macro strategy at Barclays, noted, "China is less affected by energy transmission effects, and its economic starting point is also quite different." He added that the People’s Bank of China is in a "different position" compared to other central banks and "still expects further easing in China."
In contrast, the Federal Reserve and the European Central Bank are being forced to maintain higher interest rates to combat inflationary pressures, putting downward pressure on bond prices.
Beyond macroeconomic fundamentals, the resilience of China’s government bond market is also supported by its unique demand structure, as a large number of domestic investors shift their funds into the bond market. It is this low correlation with global bond markets that has allowed Chinese government bonds to remain resilient amid the current global sell-off.
**Global Investors Reassess Long-Term Value of China’s Bond Market**
Although yields on Chinese government bonds have risen since the beginning of last year, interest from global institutional investors in this market continues to grow.
In a recent report, Charles and Louis-Vincent Gave, co-founders of research firm Gavekal, pointed out, "Since 2012, investing in Chinese government bonds has been one of the few ways for global government bond investors to outperform U.S. inflation. Other major bond markets have recorded significant real losses, with some markets, such as Japan, Germany, and the U.K., even posting negative nominal returns over this 14-year period."
At the same time, uncertainty surrounding Federal Reserve policy has indirectly enhanced the relative appeal of Chinese government bonds. Continued pressure from Donald Trump on Fed Chair Jerome Powell to cut interest rates has created confusion about the direction of U.S. monetary policy. In contrast, Wei Li of BNP Paribas noted that the monetary policy of the People’s Bank of China is "quite predictable," adding that "when investors buy government bonds, the last thing they want is this kind of uncertainty—what they need is stability."
