Big, long-term trends could drive Developed Market bond yields much higher than the cyclical peaks that the market is currently pricing in. There are cycles and there are secular trends. If the super cycle of rates and yields has turned – off deep negative inflation-adjusted levels – then the lesser cycles could mean- revert a lot higher around long-term uptrends. And we are at this juncture at the moment, as the negative yielding bonds have literally disappeared - the global stock of negative yielding bonds had gone from a peak of US$18.4 trillion late in 2020 to zero recently. What are the true implications behind this abrupt turn of tides? In this article, our Senior Advisor Say Boon Lim discusses the big drivers for potentially much higher rates and yields for this year, and areas we are spending a lot more time monitoring, as the longer-term outlook could be far worse than just a mean reversion in nominal rates and yields as we may also be in the midst of a secular mean reversion in real government bond yields and corporate credit yields.

Global markets have been subject to higher volatility so far in 2022 amid escalating inflation and recession risks. The US rate hike cycle has added further pressure to the dollar return of most foreign-currency-denominated assets due to the strengthening dollar. In this article, we describe the genesis behind the recent addition of USD hedged unit class to our Premia China Treasury and Policy Bank Bond Long Duration ETF (9177.HK), which is the first among peers to offer USD hedging feature in Asia. For investors that are mindful of mark to market risk amid continued US interest rate hikes, as well asset owners with long duration allocation needs, the Premia China Treasury and Policy Bank Bond Long Duration ETF is a unique tool that provides access to the long duration Chinese government and policy bank bonds with strong A1 sovereign bond rating, competitive yield of over 3%, stable yield volatility and now with the USD hedged unit class, additional optionality to capture the steady yield of China sovereign bonds whilst minimizing exchange rate risks for RMB.

Most asset classes did not perform well so far this year amid the rising interest rate environment and the Ukraine-Russia conflict, e.g., -12.8% in developed market equities, -10.1% in emerging market equities, -4.0% in global bonds, -29.1% in cryptocurrencies. The only exception was commodity, which went up over 32% year-to-date. Crude oil prices keep getting higher with no sign of a pullback in near-term, leading to a mounting inflation pressure to the global economic recovery. Investors are now thinking hard to reallocate their assets and shift away from the risky exposure. Riding the commodity rally by increasing the position in oil or gold may be one of the options, but the usual high volatility and negative carry are always the obstacles for placing any significant bets.

Amidst the high risk of holding Developed Market government bonds and credits in an environment of rising inflation and historically low spreads, a frequent lament among institutions and large family offices is “but our mandate requires us to hold bonds.”

The inflation threat is now clear and present. And while equities may tolerate rising US inflation for a while longer, the Developed Market bond markets are highly vulnerable.

As our Senior Advisor Sayboon Lim stated in the article “Gimme shelter” that it is essential for investors to have China sovereign bonds in their asset allocation, it would be timely for us to introduce the newly launched Premia China Treasury and Policy Bank Bond Long Duration ETF for your consideration.

Index provider FTSE Russell will add Chinese Government Bonds (CGBs) to the FTSE World Government Bond Index (WGBI) over three years from the end of October – a move that is expected to draw billions of Dollars of new portfolio inflows. Already, there has been a sharp increase in foreign inflows into RMB bonds over the past 12 months, accelerating soon after the start of the pandemic. In this 2-part series, our Senior Advisor Say Boon Lim highlights the drivers for new demand for CGBs and the reasons to own them.