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China Market Updates (16 March 2015 - 20 March 2015)

Published time:[23 Mar, 2015 14:24] From:E Fund Management (HK) Co., Limited

China Market Updates (16 March 2015 – 20 March 2015)

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Market Review

With no major macro data released last week, bond market changed to negative sentiment after the one day rally brought by weak fundamentals, as market still have concern that bond market has limited space to go. But as liquidity was getting better, the market gained a lot last Friday. Over the week, Chinabond Composite Total Return Index dropped slightly from 163.66 to 163.47, down by 0.12%. 10 yr treasury yield (CUTB10) increased 0.8 bps, from 3.488% to 3.496%.

Source : Bloomberg 21 March 2015
Source: Bloomberg 21 March 2015

Yield curve steepened over the week, with 4 and 5-year treasury yield dropped more than 3 bps while 7 and 8-year yield rose by more than 3 bps. Short term yield didn’t change much, as liquidity was getting better, but market still has concern of quarter end and beginning of April liquidity of the market. Credit spread declined in the first trading day of the week but picked up on last Friday, ending the week with almost no change on the gauge.

Source: Bloomberg 21 March 2015
Source: Bloomberg 21 March 2015

10 Year Treasury Listing

Last Friday was the first trading day of 10 Year Treasure Futures (Dominant contract BBID: TFTU5 COMDTY). With its successful debuts, China’s bond market now has two futures contracts as hedging tools (5 Year Treasure Futures was listed on 6 Sep 2013). Key factors of the two derivatives are as below:

  5 Year Treasure Futures 10 Year Treasure Futures
Underlying Unit Mid-term China Treasury note with 3% coupon rate and a face value of RMB 1,000,000 Long-term China Treasury note with 3% coupon rate and a face value of RMB 1,000,000
Deliverable Grades China Treasury notes with a remaining term to maturity of at least 4 years, but not more than 5.25 years, from the first day of the delivery month China Treasury notes with a remaining term to maturity of at least 6.5 years, but not more than 10.25 years, from the first day of the delivery month
Price Quote Clean price of 100 face value Clean price of 100 face value
Tick Size
(minimum fluctuation)
0.005 per 100 face value 0.005 per 100 face value
Contract Months The first three consecutive contracts in the March, June, September, and December quarterly cycle The first three consecutive contracts in the March, June, September, and December quarterly cycle
Maximum Price Change T-1 closing price ±1.2% T-1 closing price ±2%
Minimum Margin 1% of contract value 2% of contract value
Trading Hour 09:15-11:30 , 13:00-15:15 09:15-11:30 , 13:00-15:15
Last Trading Day Second Friday of the Contract Month Second Friday of the Contract Month
Last Delivery Day Third business day after Last Trading Day Third business day after Last Trading Day
Delivery Method Physical Delivery Physical Delivery
Source: China Financial Futures Exchange website, as of 21 March 2015

From our experience, treasury futures will provide liquidity to non-key-term bonds, such as 8 or 9 year treasuries. Components of E Fund Citi Chinese Government Bond 5-10 Years Index ETF (BBID: 2808 HK EQUITY) will benefit from this. In the past, only bonds with years to maturity between 5-7 years were covered by treasury futures (5 Year Treasure Futures used to cover 4-7 years treasury bonds). But now, with 10 Year Treasure Futures covering long term end of the index components, the ETF holdings will have better liquidity.

Market Outlook

Fundamentals are still supportive to bond market, so the risk will keep low. But short-termly, liquidity will dominate the market trend and cause adjustment from time to time. Yield curve will keep flat until material change to fundamentals. As IPOs investment is generating very high annualized return, almost without risk, risk-free rate will keep at a high level. This blocked the downward space of long term yield.

We see great opportunity investing in bonds issued by Local Government Fund Vehicles (LGFV bonds). These bonds used to be treated as Chinese version “High Yield” bonds as the solvency of the issuers are weak. But in the future, the Chinese government will replace them with municipal bonds issued by provincial governments. This will make these bonds upgrade from “High Yield” to somewhat sovereign or quasi-sovereign and benefit the investors. However, only those classifies as government liabilities can be replaced. Our credit research team does deep research on every LGFV bond issuer (some through on-site visit) and internally gives the probability of each bond being classified as government debts. This internal data pool will help our portfolio managers to make investment decision.

Key Market Change

Source: Bloomberg 21 March 2015
Source: Bloomberg 21 March 2015
Source: Bloomberg 21 March 2015
Disclaimer: 
This is neither an offer to sell nor a solicitation of any offer to invest in any of the funds or products managed by E Fund Management Co. Limited and/or E Fund Management (HK) Co., Limited.
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E Fund Management (HK) Co., Limited has based this document on information obtained from sources it believes to be reliable but which it has not independently verified.  Information, opinions and estimates in this document reflect a judgment at its original date of publication and are subject to change without notice.
This document has not been reviewed by the SFC of Hong Kong. Issued by E Fund Management (Hong Kong) Co., Limited.
Copyright © 2015 E Fund Management (Hong Kong) Co., Limited, All rights reserved.

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