(Yicai Global) Dec. 4 -- Overseas investors added to their holdings of Chinese bonds for a 24th month in a row in November as the US dollar continues to devalue against the Chinese yuan.

Foreign ownership of Chinese bonds jumped almost 48 percent to CNY2.77 trillion (USD423.8 billion) last month from a year earlier, the 21st Century Business Herald reported today, citing China Central Depository and Clearing.

Many foreign institutions regard yuan-denominated bonds as an important tool to hedge against the risks of a depreciating US dollar, said Marc Chandler, global head of currency strategy at US private bank Brown Brothers Harriman.

The redback has risen relentlessly against the dollar in the last half year, as the Covid-19 pandemic takes its toll on the global economy. The onshore yuan-dollar exchange rate was 6.5328 at 3.52 p.m. China time, a gain of 3 percent in the last month and almost 9 percent from July.

The US dollar index, which measures the value of the greenback against a basket of currencies, has fallen to a two and a half year low and many investment institutions believe the US Federal Reserve’s intensified quantitative easing will cause it to drop another 4 percent in the next six months, Chandler said.

Owning yuan bonds can secure at least a 4 percent exchange rate gain, enough to make up for the erosion of fixed income returns due to negative interest rate bonds in developed countries, he added.

US bond yields have picked up greatly in the last month, a Wall Street hedge fund manager said. But many investment institutions believe that any gains in mid- and long-term US bond yields will not last long as the Fed has been signaling that it will buy more mid- and long-term Treasury bonds.

That could result in the China-US interest rate differential continuing to widen, which together with the prospect of further yuan appreciation in the medium and long run, is making yuan bonds one of the best safe-haven assets amid the uncertainties of Covid-19, he added.

A large European asset management firm is planning to increase the allocation of yuan bonds in its global fixed income portfolios to 8 percent from 5 percent since the appreciation of the redback is unlikely to reverse, the company’s Asia-Pacific regional chief representative said.

Should interest rates abroad continue into negative territory due to increased QE by central banks in Western countries, the company will consider further hiking this allocation to 10 percent, he added.

Editor: Kim Taylor