Investor demand lowers yield on China’s dollar bonds

• Chinese bonds close to US price
• $2bn in bonds sold in Riyadh
• Call for dollar-denominated debt

Strong investor demand has lowered the yield on Chinese dollar bonds originally sold in Riyadh last November to below those of United States’ 10-year treasuries.

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This negative spread indicates pent-up demand for similar Chinese paper and could lead Beijing to sell more debt in Saudi Arabia, which is China’s second-largest oil supplier.

In mid-November, China sold $2 billion of dollar-denominated bonds in Saudi Arabia, its first debt issuance denominated in the US currency since October 2021.

The bond issue attracted orders of nearly $40 billion, China’s Global Times reported, citing a finance ministry statement, meaning it was 20 times oversubscribed.

China sold $1.25 billion of three-year bonds that were priced at 4.274 percent, which was only one basis point above US 10-year treasury bonds, the Financial Times reported. 

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China also sold $750 million of five-year debt that was priced at 4.294 percent – three basis points higher than US 10-year treasuries, which serve as the benchmark for bond pricing.

“The initial pricing reflects the strong technical demand for dollar-denominated sovereign debt,” Billy Kewley, a credit trader at Stone X in Singapore told AGBI. 

“This being China’s first dollar issuance in three years and domestic onshore rates remaining low (were) both factors.”

As of January 2, the three-year bond’s yield had fallen to 3.899 percent while that of the five-year bond was 4.0165 percent, according to website bondsupermart. The bonds are traded over the counter. Yields on US 10-year treasury bonds have increased to 4.573 percent.

Bond prices and yields are inversely correlated so the Chinese dollar bonds’ falling yields indicates strong buying demand in the secondary market and confidence in China’s creditworthiness, although other factors such as a mixed outlook for further US interest rate cuts are also influential.

The ask – or selling – prices of the three- and five-year bonds were 100.66 and 101.99 respectively on January 2. Bonds are first sold at 100.

“Demand in the secondary market for the recent dollar bonds China issued in Saudi Arabia has remained strong,” says Kewley. “These bonds have continued to trade at negative spreads compared to US Treasuries.”

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The issuance marks a further deepening of ties between Opec’s top oil producer and the world’s largest economy by purchasing power parity. 

China, which has A+ credit ratings with both S&P Global Ratings and Fitch Ratings, usually issues dollar bonds in Hong Kong.

“By issuing dollar bonds in Saudi Arabia that compete directly with US treasuries, and getting essentially the same interest rate, China is demonstrating it can operate as an alternative manager of dollar liquidity right in the heart of the petrodollar system,” Arnaud Bertrand, a French entrepreneur based in China, wrote on X.

“For Saudi Arabia… this creates a new option for investing their dollars: (the country) can invest with the Chinese government instead of the US,” Bertrand wrote.

“The choice of Saudi Arabia and the fact that the Saudis agreed to this is particularly significant given [the country’s] historical role in the global dollar system.”

China is Saudi Arabia’s biggest trading partner, accounting for 16 percent – or SAR14.95 billion ($4 billion) – of the kingdom’s total exports in October 2024. That same month Saudi Arabia imported SAR17.58 billion of Chinese goods.

Saudi Arabia owned US treasuries totalling $139.2 billion as of October 2024, the most recent US government data shows, up from $117.5 billion a year earlier but below last September’s $143.9 billion.