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China’s benchmark 10-year bond yield fell below 2% on Monday, its lowest level in 22 years, as investors bet on further monetary easing to stimulate the world’s second-largest economy.
The yield on 10-year government bonds, which is inversely proportional to inflation, fell to 1.9995% in morning trading, the lowest level since April 2002. The yield on the 30-year Treasury note fell 3.1 basis points to 2.17%. Both yields rebounded slightly in afternoon trading.
Investors are betting on further cuts in interest rates and lower deposits banks must hold in reserve, analysts said.
China’s move into benchmark bonds comes as the country’s long-term bond yields have fallen below Japan’s for the first time, and investors are concerned about the possibility of the country’s “Japanification” of the economy plunging into persistent deflation.
The People’s Bank of China has steadily lowered interest rates in recent months to encourage more lending and stimulate the economy.
In September, banks’ reserve requirements were cut by 50 basis points to an average of 6.6%, and the benchmark seven-day reverse repo rate was cut by 20 basis points to 1.5%. In October, the one-year loan prime rate, which is the standard rate at which banks decide the price of their own loans, was lowered by 25 basis points to 3.1%.
The economy is struggling to overcome a long-standing crisis in the real estate sector and is plagued by deflationary concerns. The election of Donald Trump as president of the United States, who campaigned on a promise to raise tariffs on Chinese goods, has increased widespread anxiety.
Analysts and investors increasingly believe these factors will prompt Chinese policymakers to ease monetary policy.
“The market generally expects that monetary policy will continue to be aggressive,” said Huazhuang Securities analyst Zhou Guannan. “Ample market liquidity and expectations for easing measures will further push bond prices higher.”
Zhu Wang, head of Greater China foreign exchange and rates strategy at BNP Paribas, said the recent reduction in non-bank financial deposits had put pressure on yields. He also said investors expect the central bank to fix interbank repo rates at lower levels and cut reserve requirements by up to 50 basis points.
Overall, yields on China’s long-term government bonds have fallen since the start of the year, as small Chinese banks with limited domestic investment options piled into relatively safe assets: government bonds. At the beginning of the year, the 10-year bond yield was 2.56% and the 30-year bond yield was 2.84%.
“Sovereign bonds remain very attractive for investors as the end of the year approaches,” said Ming Ming, chief economist at CITIC Securities. “Seasonal demand is strong, reducing supply-side risk, especially as this year’s bond issuance is almost complete.”
The central bank had previously intervened in the bond market over concerns that rising demand would trigger a bond market bubble, but a lack of new supply in December eased those concerns.
Mr Min said the situation was favorable for lower yields. “(A decline in sovereign bond yields) will lead to a decline in financing costs for the real economy,” he said. Looking ahead, Min expects 10-year bond yields to remain around the 2% range or slightly lower.
Also on Monday, the Chinese yuan fell to a four-month low after President Trump said he would impose 100% tariffs on BRICS countries that support efforts to “alternative to a strong US dollar.”
While the dollar index rose 0.5%, the yuan fell 0.3% to 7.27 yuan to the dollar, its lowest level since late July.
Additional reporting by William Sandland in Hong Kong
