It's not US Treasuries! Amidst the flames of war, the only safe haven in the world turns out to be Chinese government bonds!

Since the outbreak of the war in Iran, the global bond market has witnessed a large-scale sell-off, while Chinese government bonds have become the only safe haven against the trend.

Since the outbreak of the conflict, the yield on China's 10-year treasury bonds has slightly declined to 1.82%, while the yield on the US 10-year treasury bonds has soared by 38 basis points to 4.34% during the same period. The yield on UK treasury bonds has even risen by 70 basis points.

This divergence indicates that against the backdrop of surging energy prices and rising global inflation, investors are viewing Chinese government bonds as a rare safe-haven asset.

Jason Pang, senior portfolio manager and head of local rates and foreign exchange for Asia at JPMorgan Asset Management, said that Chinese government bonds "offer us such investors a very low-correlation investment option".

China's energy structure and low inflation build a firewall for its bond market.

The core logic behind investors' bet on Chinese government bonds lies in the inherent resilience of the Chinese economy against this energy shock.

Unlike most economies in Europe and Asia that are highly dependent on imported energy, China's energy structure is relatively diverse, with coal and renewable energy playing significant roles. Meanwhile, China has a large strategic petroleum reserve, which to some extent shields it from the impact of this energy shock - while South Korea, Japan and neighboring Southeast Asian countries are under greater pressure.

Mitul Kotecha, head of Asian foreign exchange and emerging markets macro strategy at Barclays, pointed out that "China is less affected by energy transmission and its economic starting point is also completely different." He added that the People's Bank of China is in a "different position" from other central banks and "still expects further easing in China."

In contrast, the Federal Reserve and the European Central Bank are being forced to maintain higher interest rates to deal with inflationary pressures, which is putting pressure on bond prices.

In addition to the macro fundamentals, the resilience of China's treasury bond market also benefits from its unique demand structure, with a large number of domestic investors shifting their funds to the treasury bond market. It is precisely this low correlation with global bond markets that has enabled China's treasury bonds to remain unscathed in this round of global sell-offs.

Global investors are reassessing the long-term value of China's bond market.

Although the yield on Chinese government bonds has risen since the beginning of last year, global institutional investors' interest in this market continues to heat up.

In a recent report, Charles and Louis-Vincent Gave, co-founders of research firm Gavekal, pointed out that "since 2012, investing in Chinese government bonds has been one of the few ways for global government bond investors to outpace US inflation. Other major bond markets have recorded significant real losses, and some, such as Japan, Germany, and the UK, have even seen nominal negative returns over the past 14 years."

Meanwhile, the uncertainty of the Federal Reserve's policy has also imperceptibly raised the relative attractiveness of Chinese government bonds. Trump's continuous pressure on Federal Reserve Chair Powell to cut interest rates has left the market confused about the direction of US monetary policy. Wei Li of BNP Paribas said that in contrast, the monetary policy of the People's Bank of China is "quite predictable", and "when investors purchase government bonds, the last thing they want to see is such uncertainty; what they need is stability."

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