On July 2, 2021, Gavekal launched the Gavekal Asian Government Bond ETF (AGOV). Louis-Vincent Gave, Founding Partner and Chief Executive Officer, Gavekal, explains the shortfalls of U.S. Treasuries and how Asian Government Bonds have the potential to offer more compelling value and better diversification than western bonds.
Investors typically buy bonds for two reasons. First, bonds offer decently high guaranteed returns, and second, they provide diversification in a broader portfolio. Because bonds tend to do well when equities do badly, owning bonds allows investors to take on more risk on the equity side.
In the economic landscape of low interest rates in the United States today, it makes much more sense to invest in bonds abroad. By looking at U.S. bond yields, and comparing the yield of 1.3% in the United States to 3.1% in China, it’s clear that investors are better off investing in Chinese government bonds than US treasuries, from a return standpoint.
Real rates in Asia today are far superior to real rates in the United States, Germany, and across most western countries. The surge in the U.S. money supply that accompanied COVID-19 may foreshadow the upcoming weakness of the U.S. dollar. Additionally, the record amount of the United States’ debt, compounded by the expansion of the money supply, results in most of those dollars going abroad. Because of this, there’s been rapid expansion in the U.S. trade deficit, which translates to a rapid expansion in China’s trade surplus. Moreover, U.S. Treasuries are no longer doing the job that they’ve historically been expected to do in portfolios.
Gave poses the question: “If you can’t trust them to act in your favor in times of equity pullbacks, it raises the question: why keep U.S. treasuries in your portfolios, and if they’re not going to do the job they’re intending to, then what will?” Gave answers this question by pointing to the outperformance of Chinese Government Bonds over the last ten years. Recently, international investors have been buying Chinese bonds at unprecedented rates, but their outperformance is not a new phenomenon.
Since opening to international investment in 2009, Chinese Government Bonds have outperformed many other developed bond markets. Gavekal Asian Government Bond ETF (AGOV) seeks to provide absolute positive returns through investment in the government bonds of asian countries, predominantly in local currencies. AGOV invests in developed markets, emerging markets, frontier markets, in bonds with maturities of between six and twelve years. The ETF offers investors the opportunity to diversify away from the risk of the weakening of the US dollar and US Treasury bonds. Gavekal is a leading independent provider of global investment research.
Founded in 2001 and headquartered in Hong Kong, the financial services company focuses on financial research for institutional investors, money management, and software services for investment professionals.
To learn more, catch the replay of Gavekal’s recent presentation: A Case for Investing in Asian Bonds.
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