Typically sovereign bonds of super-major nations are considered safe haven assets for the respective populations. It seems certainly true in the US, less so in a place like Russia.
China booked its first major outflow of funds to Chinese government bonds in ~3 years, and biggest outflow on record. The Australian Financial Review pondered potential reasons including:
- Rapid rise in Western bond yields while Chinese yields have been flat
- Russia selling its hoard Chinese bonds to fund itself
- Western investors seeing man increased probability of a NATO vs. China standoff in some form in the future
It goes on to demonstrate that the first two seem unlikely and the third being the likely reason. Specifically:
…Western holders of Chinese government bonds are being forced to contemplate, not a new scenario, but a new playbook for a known scenario.
This involves China inexorably exerting more geopolitical influence until a crisis is reached. Then, the West responds firstly with far-reaching financial sanctions, inclusive of the PBOC, SWIFT, and US-dollar settlements more generally.
Although China would be loath to impose capital controls in the context of its long- run ambitions to establish RMB as a reserve currency, the possibility can no longer be ruled out in extremis.
This leaves Western holders of Chinese government bonds, putatively a risk-free asset, facing a non-negligible yet catastrophic risk. Hence, the recent outflows, we think.
AFR – The West is Dumping Chinese Government Bonds
Generally speaking this risk is low right now, but as the article mentioned, anything that opens up potential catastrophic risk for an asset should be duly noted. Chinese government bonds (or any Chinese businesses for that matter) are assets I have stayed far away from.