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10Y Bond Yield Premium (over US) Approaching Zero

CHINA
  • Interestingly, China 10Y bond yield, which has constantly been offering a moderate to significant premium over US 10Y yield in the past cycle, has been falling dramatically in the past year and is approaching zero.
  • Since its local high at 3.3580% reached in November 2020, China 10Y yield has been constantly testing lower highs as the 'zero-Covid policy' has been significantly weighing on growth expectations.
  • China 10Y yield fell back below the 2.8040% level in the end of March, which corresponds to the 61.8% Fibo retracement of the 2.4610% - 3.3580% range. Next support to watch on the downside stands at 2.6730% (76.4% Fibo).
  • On the other hand, US 10Y yield has been constantly testing new highs amid rising inflation risks (with market pricing in the Fed behind the curve in its tightening process).
    • The US 10Y yield broke above its 2.5650% key level this week (76.4% Fibo retracement of the 0.3140% - 3.26% range) and is currently trading at its highest level since March 2019.
  • As a result, China 10Y yield premium has fallen sharply in recent months, from 155bps in early December to 8bps on Friday.
  • The last time the ‘premium’ was negative was in May 2010.
  • The premium on the 2Y yield (China vs. US) went negative in the end of March following the dramatic surge in US ST rates in the past month.

Source: Bloomberg/MNI.

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