Foreign investors cut holdings in China's onshore bonds in September
Adds details, analyst comment in paragraph 6, regulator comment in paragraph 10
SHANGHAI, Oct 22 (Reuters) -Foreign investors reduced their holdings of China's onshore yuan bonds in September for the first time in over a year, as the yuan's appreciation made it less attractive to hold hedged onshore bonds.
Foreign institutions held 4.39 trillion yuan ($616.14 billion) in bonds traded on China's interbank market as of the end of September, the central bank's Shanghai head office said, down from 4.52 trillion yuan a month earlier.
This is the first time foreign investors have reduced their onshore yuan bond holdings since August 2023.
Foreign investors had been increasing their yuan bond positions since Sept. 2023, as the returns after hedging on yuan bonds were far superior to those on equivalent U.S. treasuries.
That premium had been shrinking over the past few months as the dollar weakened versus the yuan in anticipation of Federal Reserve rate cuts in September.
While there is less of an opportunity to earn higher yields via hedging, yuan bonds remain a good market hedge against further unwinding of the global carry trade and massive risk-off events, said BNP Paribas' head of Greater China currency and rates strategy, Wang Ju.
Most of the decline in foreign holdings of yuan bonds last month was in government bonds, which fell by 110 billion yuan.
Chinese government bonds have had a record-breaking rally since the start of the year, with long-dated bond yields hitting record low levels as investors seek safe-haven assets.
Market participants are awaiting the outcome of the U.S. election on Nov. 5 to gauge sentiment for China assets, which may affect the yuan and the attractiveness of onshore bonds.
China's foreign exchange regulator said at a press conference on Tuesday that there has been growing foreign appetite for yuan assets, with overseas investors increasing their purchases of onshore stocks since late September.
($1 = 7.1250 Chinese yuan renminbi)
Reporting by Shanghai Newsroom; Editing by Jamie Freed and Sonali Paul
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