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Bond

China sells bonds at a negative rate for the first time

Strong investor interest as 4bn-euro issue attracts bids worth 17bn euros

China's bonds have lured yield-hungry investors who have focused on the nation's economic recovery. (Source photos by Reuters) 

HONG KONG -- China, whose bonds have been a magnet for global investors because of their relatively high returns, has for the first time sold government debt at a negative interest rate -- joining the "club" of nations that are seeming to defy economic logic by in effect getting investors to pay to lend them money.

Highlighting an era of record-low interest rates, China -- which raised 4 billion euros ($4.75 billion) in a three-part deal -- priced the five-year part of the bond at -0.15%, according to a term sheet seen by Nikkei Asia. That was 30 basis points above the so-called mid-swap rate of -0.45%.

China sold 750 million euros worth of 5-year bonds, 2 billion euros worth of 10-year bonds at 0.32% and 1.25 billion euros of 15-year bonds at 0.625%, according to the terms of the deal.

"China is benefiting from the low rates to achieve a more diversified currency mix and investor base," said Michelle Lam, greater China economist at Societe Generale in Hong Kong.

"European and other international investors have already been buying the nation's bonds in search of yield through the Bond Connect program in Hong Kong and other mechanisms," Lam said. "The latest transaction gave them an opportunity to add to their portfolio without having to worry about hedging costs."

The negative yield for the five-year tranche compares with a 3.17% yield offered by the country's yuan-denominated five-year bond. Globally, the universe of negative-yielding bonds now stands at more than $17 trillion.

China is diversifying its bond currency mix away from the U.S. dollar and the yuan, and the latest deal follows a 4-billion-euro offering of seven-, 12- and 20-year maturities last year, the first since 2004. The Eurobond offering by China comes as nearly all the short- and medium-term eurozone government debt now carries negative rates, meaning investors in effect pay to own it.

The bond sale attracted bids for more than 17 billion euros, according to two people familiar with the transaction, allowing lead managers to trim the spread on the three parts by 15 to 20 basis points.

The bond offering "was eaten up quickly, which is not a surprise as the credit sentiment on China is positive and the bond still has a higher yield than average," said Hong Kong-based Paul Sandhu, head of multi-asset quant solutions for Asia-Pacific at BNP Paribas Asset Management.

China's bonds have lured yield-hungry investors who have focused on the nation's economic recovery after it controlled the coronavirus pandemic and shrugged off mounting tensions between Washington and Beijing. A $6 billion bond issuance last month drew orders for more than 4.5 times the debt on offer.

China's bond yields are far higher than developed markets. Its one-year paper offers 2.96% and its 30-year debt yields 3.97%. Comparative U.S. yields range between 0.11% and 1.59%. Foreign investors held a record 3 trillion yuan ($457.5 billion) of Chinese bonds, up from 2.3 trillion yuan at the start of the year.

China is on course to be the only major economy to grow in 2020. A Reuters poll of economists in late October forecast fourth-quarter gross domestic product to rise 5.8% year-on-year, quickening from a pace of 4.9% in the July-September period. Growth is projected to surge to 8.4% in 2021, as the global economy recovers from the pandemic, according to the poll.

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