(Yicai Global) June 11 -- China’s bond market is beginning to look more attractive as yields have rallied after declining last month due to a round of deleveraging aimed at mitigating the negative impact of the coronavirus. There is reason to be cautiously optimistic, a bond fund manager at UBS Asset Management told Yicai Global.

The yield of 10-year government bonds stood at 2.85 percent this morning, up from 2.52 percent in mid-April. If it tops 3 percent, long-term investors are likely to greatly increase their holdings, Lou Chao said.

The spread, or difference in yields, between Chinese and US treasuries is at a record 200 basis points. This makes yuan-denominated bonds relatively attractive to overseas capital, Lou said. For overseas institutional investors, buying government bonds when yields rebound is definitely a good opportunity, he added.

The current market environment favors interest rate-linked bonds that mature quicker, Lou added. Government bonds due in three to five years are more attractive to overseas-funded institutions, as they will give buyers adequate protection from spread, he said.

There is no need to worry about a fallout from an oversupply of local government bonds, central government bonds and special anti-epidemic bonds, Lou said. This is because bonds are issued as scheduled and China’s central bank will closely monitor the market to ensure the stability of liquidity before and after each issuance.

There has been a significant fall in the number of bond defaults in the first half indicating that easy credit has helped many firms bridge liquidity difficulties in the short run and has reduced the risks of investing in bonds to some extent, Lou said.

But in the long run, companies with insufficient credit scores may still face cash flow difficulties, he added.

Editors: Tang Shihua, Kim Taylor