In particular, we consider the extent to which CGBs can help diversify a broader government bond portfolio, improve yields relative to developed market (DM) government bonds, and offset equity risk. In summary, we find that CGBs:
- Have low correlations with DM government bonds
- Do not share the common “global duration driver” that DM yields do
- Are negatively correlated to global equity risk
We also address a number of challenges and considerations that we believe investors should bear in mind, including currency exposure, China’s unique policy environment, and the potential for CGBs to become more correlated to other bond markets over time.