CHINA’S benchmark government bond yield fell to a record low, testing policymakers’ resolve to stem the move.
The yield on the 10-year sovereign note fell to 2.17 per cent on Friday (Jul 26), below the 2.18 per cent hit on Jul 1, according to data compiled by Bloomberg going back to 2002. Recent interest rate cuts by the People’s Bank of China (PBOC) to boost a flailing economy have undermined its efforts to guide longer-dated bond yields higher.
Pessimism is growing towards the world’s second-largest economy, putting pressure on yields as traders seek havens and expectations grow of further rate cuts to come. That’s even as the PBOC prepares to borrow and sell government bonds to cool the rally, warning investors of the potential for losses should the market reverse.
“The cut to MLF rate and deposit rate led to the door for a flattening curve,” said Zhaopeng Xing, a senior China strategist at ANZ Bank China, referring to the moves in the bond market. “We expect the growth performance remains subdued in Q3. Property data will not see a rebound in the next few weeks.”
The central bank sees excessively low yields as endangering financial stability and weighing on the yuan. A Bloomberg survey had suggested 2.25 per cent was a red line for the PBOC for the benchmark 10-year note.
The PBOC has said it has hundreds of billions of yuan worth of medium- and long-term bonds at its disposal to borrow, after signing agreements with several major financial institutions. It said it would borrow the bonds on an open-ended unsecured basis and sell them depending on market conditions.
“Ultimately, the PBOC’s goal is to maintain an upward sloping yield curve rather than fixing the long-term CGB yields at a particular level,” Goldman Sachs economists led by Xinquan Chen said. “We forecast 10y CGB yields to be at 2.1 per cent by the end of this year, as front-end rates continue to decline on policy rate cuts.” BLOOMBERG
