Investment grade Chinese bonds are a relatively new subset of the investment grade asset class. ETFs offer a way to gain easy access.
Before anyone invests in the bonds, they should understand why some allocation could make sense:
Low Duration
Low duration makes for low interest rate risk.
The two more popular ETFs which invest in the space have durations in the 1.6 year-2.6 year range. The most popular U.S. investment grade index ETF has a duration of about 7.5 years!
Thus if interest rates increase one percent over the course of a year, the value of the Chinese bonds would go down by only about 1.6 - 2.6 percent, while the U.S. bonds would decrease by 7.5 percent. Even in such a rising rate environment, the overall return on the Chinese bonds would be marginally positive because they have a cash yield of about 3 percent.
Related Link: First Trust Launches Active Strategic Income ETF
A good example of this low duration advantage is 2013. The U.S. investment grade bond index, with the I-Shares Iboxx ETF (NYSE: LQD) as a reference, ...
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