(Bloomberg) — China just borrowed dollars in global credit markets at essentially the same cost as the country that prints them, and traders immediately drove the yields on the bonds down even further.
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The Asian nation raised $2 billion from three- and five-year notes that yield just one and three basis points over similar-maturity Treasuries, respectively. Then once trading kicked off Thursday, spreads tightened to about 24 and 25 basis points under Treasuries, traders said.
That adds to signs of strong demand that stood out throughout the debt sale process. Bids for the $2 billion deal surpassed $40 billion, 20 times what was on offer, according to a person familiar with the matter.
Traders said part of the strength stems from demand from Chinese investors, who have been hunting for higher returns globally as local rates grind lower. Such investors can also benefit from tax exemptions on the nation’s sovereign debt. Their enthusiasm already helped yields on some of China’s previously issued dollar bonds trade below those on Treasuries for most of the past year, a rarity because the US securities have historically been considered the safest of investments.
“Lack of dollar bond supply plus accommodative financing conditions onshore have led to a strong bid for dollar bonds from China onshore investors,” said Xue Zhou, senior China economist at Mizuho Securities Asia Ltd.
The Asian nation also priced five-year notes at three basis points over similar-maturity Treasuries in its first such issuance in the US currency since 2021. That bond was trading about 25 basis points tight of comparable US government debt on Thursday, traders said.
China’s dollar note due November 2027 has held a so-called negative spread to US Treasuries for most of the past year, and the yield on that debt security was last about 18 basis points under the equivalent US government bond, Bloomberg-compiled data show.
While China’s newly issued bonds were available to investors globally, officials last week said they would be sold in Saudi Arabia, an unusual venue given that London, New York and Hong Kong are normally being picked for such transactions. But the choice comes after recent efforts to boost economic ties. Officials from both countries met earlier this year to discuss cooperation, and the warming relations can be seen in moves such as a doubling of investment in Saudi Arabia by China’s biggest steel producer.
