BNP Paribas Asset Management has been hedging bullish bets on emerging-market bonds by shorting offshore Chinese interest-rate swaps, according to James Mc Alevey, head of global aggregate and absolute return. The firm has held long positions in debt from Mexico, Brazil and Colombia since around April.

Mc Alevey favors bonds in the three Latin American countries for their high real yields, noting rate cuts in Brazil and Mexico despite this year's energy shock. The strategy uses Chinese non-deliverable interest-rate swaps as a hedge, wagering that rates in China would eventually rise if the global bond rout intensifies.

"We're short the China bond market via derivatives at the moment, not via cash," Mc Alevey said. "We didn't do it because we didn't like China. We did it because we liked the long, but by shorting China, you cover off tail risk."

BNP Paribas Asset, which had €1.7 trillion in assets under management as of end-June, is using China's relatively calm debt market as a portfolio hedge. The $1.2 billion BNP Paribas Funds Global Absolute Return Bond fund has lost nearly 2% over the past year, while the $135 million BNP Paribas USD Short Duration Bond fund has returned 4.8%, outperforming 92% of peers.