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China’s 10-year yield falls to record low as economic crisis deepens
(Bloomberg) — Yields on China’s benchmark bonds fell to a record low as investors continued to snap up the notes amid pessimism about the domestic economy.
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The onshore 10-year government yield fell two basis points to 2.18%, expected to close at the lowest level since Bloomberg began tracking the data in 2002. 20- and 50-year bond yields have been trading at their historic lows for months.
Bonds have risen due to weak growth in China, expectations of interest rate cuts and the impact of ample liquidity in the financial system as demand for loans is so weak. An increase in government borrowing to boost fiscal stimulus has failed to ward off bond buyers.
The People’s Bank of China has been reacting to the rise and has hinted that it may sell some of its holdings to stem the advance.
The latest economic indicators highlight persistent challenges to China’s growth. Official data showed factory activity contracted for a second consecutive month in June, while new home sales extended the decline last month, albeit at a slower pace.
“The reason for the fall in yields is mainly due to the pessimistic mood in the economy,” said Stephen Chiu, head of Asia currency and rates strategist at Bloomberg Intelligence. “I really have no idea how low it will get before the PBOC rises, but the next level to watch will be 2% to 2.1%.”
The move comes as China watchers prepare for one of the country’s biggest annual policy meetings later this month, the so-called Third Plenum. Chinese leaders at an economic meeting in December said they were contemplating a “new round of tax and fiscal reform,” raising hopes that details could be revealed there.
What to expect from the Third Plenum, China’s Great Political Meeting
For Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group, the drop in yields suggests traders appear to be easing their expectations for major fiscal stimulus. He sees the benchmark yield falling to around 2.15%.
“The bond rally reflects lingering concerns about weak domestic demand and hopes that the PBOC may need to cut policy rates in the third quarter to boost growth,” he said. “Demand for bonds will be supported primarily by banks’ wealth management products as they receive continued inflows of funds from an outflow of deposits.”
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–With the help of Jing Zhao.
(Updates with additional economic data and commentary.)
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