(Bloomberg) -- China’s bond selloff is creating pockets of opportunity for foreign investors, who can swap dollars for more attractive yuan-denominated short-term bank debt — and inadvertently bolster Beijing’s support of its currency.
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The yield on one-year AAA-rated negotiable certificates of deposits, short-term debt issued by banks, rose to 2.03% this week, the highest since June, according to data compiled by Bloomberg.
That’s luring buying from global investors, according to traders. The premium between the FX-hedged one-year NCDs and a US bill of the same tenor jumped to the highest this year in March, also an indication of the former’s increased attractiveness.
Higher foreign inflows may help the People’s Bank of China curb volatility in the yuan at a time when the prospect of escalating trade tensions between the US and China have roiled market sentiment.
Foreigners held outstanding 1.07 trillion yuan ($148 billion) of Chinese NCDs as of the end of January, the highest since September, according to Bloomberg data.
Increased global purchases of NCDs led to higher foreign-exchange hedging demand in the onshore market, helping push up the one-year swap rate to the highest since October this month.
The flows “perhaps amplified the CNY FX swap movement,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank Ltd. “It may not be a direct support to defend the CNY, but could facilitate Chinese banks to swap USD funding to defend CNY spot if necessary.”
Appealing NCDs
“With NCD rates mostly back up to around 2% level, while implied yuan rates are anchored, some foreign investors may see it as appealing to re-enter the market with small positions,” said Frances Cheung，head of FX and rates strategy at Oversea-Chinese Banking Corp.
The yields on NCDs have risen since January, as the PBOC restrained liquidity offerings to the financial system in efforts to reduce yuan supply and support the currency. Higher supply of NCDs also drove yields higher.
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