10Y Yield Remains Low Despite Improvements In Economic Activity

• China 10Y yield keeps trading at low levels despite some improvements in economic data in recent weeks.
• The chart below shows that China economic surprises index has co-moved strongly with the 10Y yield in recent years; periods of weakening economic data have been associated with lower LT bonds yields and vice versa.
• In addition, we have seen that the 10Y yield has remained at historically low levels this year despite the significant surge in inflation.
• PPI inflation, which had shown a strong relationship with China 10Y yield in the past 15 years, surged to a 26-year high, while the 10y yield has been constantly testing lower highs.
• One major explanation for the compressed term structure has been the rise in Covid uncertainty with the discovery of new variant ‘Omicron’.
• As China maintains a ‘zero-Covid’ policy, the discovery of a new variant could result in renewed restrictions/local lockdowns imposed by the governments and therefore lowers growth expectations.
• China 10Y yield has been rejecting its 100DMA resistance (2.8940%) in the past week; key support to watch on the downside remains at 2.80%, which corresponds to the 38.2% Fibo retracement of the 2.46% - 3.36% range.

Source: Bloomberg/MNI