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CHINA: Bond Yields Down Again on Deflation Concerns

CHINA
  • China 10-year government bond yield breaches 2.10% in this morning trade.
  • At 2.08% this bond reflects the ongoing deflationary pressures in the economy.
  • Despite evidence of the PBOC selling 10-year securities in the last week, it has been unable to arrest the constant decline in bond yields.
  • For some time it was believed that authorities were unwilling to let the 10-year move below 2.15% in yield.
  • However, it appears that the Central Bank may be powerless to stop the relentless rally as the flow of capital continues into bonds, likely coming out of the suffering real estate sector.
  • Market participants believe the central bank is fighting fundamentals since weak economic performance and rising expectations of further easing point to lower yields, and that the PBOC’s bond trades, in which it buys the short end and sells longer-dated CGBs to steepen the yield curve, are only delaying the inevitable trend
  • Our MNI Policy team anticipate a cut in the 7-day repo rates by more than 10bps could be necessary to support efforts to stem the move lower in yields and steepen the curve..   
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