China’s govt bonds extend gains, 10-year yields hit two decade low

SHANGHAI: China’s government bonds extended gains on Wednesday, lifted by persistent investor expectations for imminent monetary easing to prop up growth in the world’s second-largest economy.

Investors are rushing to cover existing short positions after the drop in yields and build additional long positions in the market, traders said.

Signs of a sputtering economic recovery, highlighted by data on Wednesday showing China’s manufacturing sector contracted in January for a fourth month, and heightened deflationary pressure have raised investor bets for further easing after China announced a deep cut to bank reserves last week to support the economy and plunging stock markets.

Yields on the benchmark 10-year government bond, fell nearly 2 basis points to 2.4275%, the lowest since June 18, 2002.

And yields on the ultra-long 30-year government bonds dropped further to a historic low of 2.645%.

And, the most-active contracts for both 10-year, and 30-year treasury futures rose to records at the market opening before paring some gains. Yields have an inverse relation with bond prices - as prices increase, yields fall.

“We are holding on to this long 10-year Chinese government bond (CGB) position noting that there may be further easing ahead amidst challenging economic conditions,” said Radhika Rao, senior economist at DBS.

China’s 10-year government bond yields drop to lowest since June 2002

China’s manufacturing activity contracted for the fourth straight month in January, suggesting the sprawling sector was struggling to regain momentum at the start of 2024.

“Economic momentum remained muted as the deflationary pressure persists,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“Real interest rate is too high which discourages private investment. I expect the PBOC to cut rates in the first half of this year to boost domestic demand.”

With the 10-year yield now falling below the central bank’s medium-term policy rate, bond traders expect the breach could lead to a policy rate reduction as soon as mid-February, when the People’s Bank of China (PBOC) is due to roll over its medium-term lending facility (MLF) loans.

“The key issue remains the economic fundamentals,” said a trader at a bond fund.