(Yicai Global) April 16 -- The Bloomberg Barclays China Aggregate Index, the main gauge of China’s debt market, returned 0.94 percent in the first three months of this year, the second-best performance among the compiler’s global aggregate indexes.

The return on Chinese government bonds ranked first in the global bond index. The data showed that the Bloomberg Barclays China Treasury + Policy Bank Index excluding currency fluctuations returned 0.75 percent in the first quarter, higher than the returns of the euro (-1.9 percent), the US dollar (-3.28 percent) and the British pound (-6.55 percent) in Bloomberg Barclays’ global aggregate indexes.

Specifically, the Bloomberg Barclays China Aggregate Index gained 0.68 percent last month after a fall of 0.02 percent in February, pulling the index’s year-to-date return to 0.94 percent, compared with a gain of 3.2 percent in the same period last year.

Foreign holdings of Chinese sovereign debt accounted for 10.6 percent of total outstanding issuance at the end of February, the highest since June 2014, according to the China Central Depository and Clearing.

Foreign investors cut their holdings of Chinese government bonds by CNY16.5 billion (USD2.5 billion) last month, ending two years of gains since February 2019.

This may be only a brief respite, however. Foreign capital inflows into China’s bond market have been too large and fast in recent years and are bound to adjust to market changes, Dongxing Securities’ fixed income team said in a report.

US government bond yields are still recovering, and the US-China spread may continue to narrow in the short term, the report added.

Chinese yuan-denominated government and policy bank bonds were fully included in the Bloomberg Barclays’s global aggregate indexes last November. The phased inclusion process started in April 2019 and took 20 months to complete.

China’s bonds account for 6.8 percent in the indexes, making the yuan the fourth-largest currency component after the US dollar, the euro and the Japanese yen.

Foreign capital inflows are still the major trend in the medium and long term. FTSE Russell will include China’s government bonds in its flagship FTSE World Government Bond Index over three years starting this October. That will also lure passive inflows.

Editor: Peter Thomas