Not U.S. Treasuries! Under the shadow of war, the world's only safe haven is actually Chinese government bonds!

Ask AI · Why does the Iran conflict cause Chinese government bonds to strengthen against the trend?

Since the outbreak of the Iran war, global bond markets have experienced massive sell-offs, but Chinese government bonds have, against the trend, become the only safe haven.

Since the conflict broke out, China’s 10-year government bond yield has edged down to 1.82%, while in the same period the United States’ 10-year government bond yield has surged 38 basis points to 4.34%, and UK bond yields have risen even more sharply, up 70 basis points.

This split-pattern suggests that, against the backdrop of soaring energy prices and rising global inflation, investors are treating Chinese government bonds as a rare safe-haven asset.

Jason Pang, Senior Portfolio Manager at JPMorgan Asset Management and Head of Asia Local Rates and FX, said that Chinese government bonds “provide an investment option with extremely low correlation for investors like us.”

Energy structure and low inflation build a firewall for China’s bond market

The core logic behind investors betting on Chinese government bonds lies in China’s natural ability to withstand this energy shock.

Unlike most European and Asian economies that are highly dependent on imported energy, China’s energy mix is relatively diversified, with coal and renewable energy accounting for an important share. At the same time, China has a large strategic petroleum reserve, which to some extent insulates it from the impact of this energy shock—whereas South Korea, Japan, and Southeast Asian neighboring countries are facing greater pressure.

Mitul Kotecha, Head of Asia FX and Emerging Markets Macro Strategy at Barclays, pointed out that “China is less affected by the energy transmission impact, and its economic starting point is also completely different.” He added that the People’s Bank of China and other central banks are in a “different position,” and “still expect China to further ease.”

In contrast, the Federal Reserve and the European Central Bank are being forced to maintain higher interest rates to cope with inflation pressure, putting downward pressure on bond prices.

Beyond macro fundamentals, the resilience of China’s government bond market also benefits from its unique demand structure, with a large number of domestic investors redirecting funds into the government bond market. It is precisely this low correlation with global bond markets that allows Chinese government bonds to stand apart during this round of global sell-off.

Global investors reexamine the long-term value of China’s bond market

Although Chinese government bond yields have recovered somewhat since the beginning of last year, global institutional investors’ interest in this market continues to heat up.

In a recent report, research firm Gavekal co-founders Charles and Louis-Vincent Gave pointed out that “Since 2012, investing in Chinese government bonds has been one of the few ways for global government bond investors to beat US inflation. Other major bond markets have recorded significant real losses, and in some markets such as Japan, Germany, and the UK, even nominal negative returns have occurred over these 14 years.”

Meanwhile, uncertainty in Federal Reserve policy is also, in an invisible way, lifting the relative appeal of Chinese government bonds. Trump’s continued pressure on Federal Reserve Chair Powell to cut rates has left the market confused about the direction of US monetary policy. Wei Li of BNP Paribas said that “by contrast, the People’s Bank of China’s monetary policy is ‘quite predictable,’” and that “the uncertainty that investors dislike the most when buying government bonds is exactly this kind of uncertainty; what they need is stability.”