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    1. Weekly Bond Bulletin

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    Bond Bulletin

    GFICC Investors

    Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.

    02 June 2023

    China dances to its own rhythm

    Since late 2022, China has shifted from stringent Covid policies to a full-scale reopening. However, it hasn’t been the big bang that many investors were expecting. We focus on what a weaker-than-expected China growth story means for fixed income investors.

    Fundamentals

    The highly anticipated reopening of China hasn’t met market expectations. Signs that growth is stumbling are already creeping into the manufacturing purchasing managers’ index (PMI), which dropped further below 50 (to 48.8 from 49.2 in April) for a second straight month and was below consensus estimates. While the non-manufacturing PMI remains in expansion territory, it is clear that PMIs across sectors have visibly moderated. In the meantime, consensus GDP growth estimates remain strong at about 5%, which is lower than earlier in the year, but not a level where we think the government would be looking to provide any stimulus. Furthermore, while many economies have experienced high levels of inflation since reopening, China appears to be the exception to the rule: its 0.1% increase in the Consumer Price Index year-over-year in April stands in stark contrast to most other regions. That said, the real estate market presents a lingering risk, given that a fall in property prices and demand has the potential to take a significant toll on the economy.

    Quantitative Valuations

    The nominal yield on the 10-year China Government Bond (CGB) remains low at 2.72% (as of 30 May 2023). This level is considerably lower than developed market equivalents, such as US Treasuries and UK Gilts, which have 10-year yields of 3.74% and 4.30%, respectively. However, given the low level of inflation in China, real yields on CGBs remain in positive territory and look attractive. Low inflation also means that the next action from the Peoples Bank of China could be to loosen monetary policy, the opposite of developed market central banks, which continue to tighten. The weakening economic data has occurred when the Chinese currency has declined to its lowest level since November vs. the US dollar, negatively impacting investors returns on existing Chinese bond investments.

    Although nominal yields are higher in the US, real yields are higher in China because inflation is lower

    Source: J.P. Morgan Asset Management, Bloomberg as of 30 May 2023.

    Technicals

    In contrast to other fixed income markets, demand for Chinese bonds has been weak in 2023. According to our internal J.P. Morgan Asset Management flow monitor, China bond mutual funds have experienced outflows of CNY 2.37 billion year-to-date ending 30 May 2023. Additionally, investor positioning in CNY is at the shortest levels seen over the past few years. With softening domestic economic demand in China coupled with falling housing prices, we think the Chinese economy could become dependent on foreign demand. Considering these factors, it is possible that the Chinese government has stepped in to weaken the currency—albeit in the background and silently—whenever it has hit a particular upper limit. Even with currency valuations already stretched, technical impacts via government intervention could lead the currency weaker in the short term.

    What does this mean for investors?

    While China continues to be an important allocation to diversified fixed income portfolios, we think there are better investment opportunities over the short term. We prefer being overweight duration through Treasuries, especially in the belly of the curve, which should be less volatile in the event of a front-end sell off due to a more hawkish Federal Reserve. However, in this case, the upside potential would also be capped if rates were to rally. Within emerging markets, we find opportunities in other local currency bonds with higher real yields than CGBs and where central banks have the ability to cut rates significantly, such as Mexico.

    About the Bond Bulletin

    Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

    Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.

    jpm_am_web_exp-icon_macroeconomic_b200_card_850x240

    Fundamental factors

    include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings and leverage metrics)

    jpm_am_web_exp-icon_stocks_g200_card_850x240

    Quantitative valuations

    is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors)

    jpm_am_web_exp-icon_stability_y200_card_850x240

    Technical factors

    are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum

    NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No. 201120355E); in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.

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    The value of investments may go down as well as up and investors may not get back the full amount invested.

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