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CHINA: Policy and Rate Cut Bets Drive Yields Lower.

CHINA
EM BulletAPACChinaEmerging Market NewsBulletMarketsFixed Income BulletsForeign Exchange Bullets
  • As China bond yields track towards new lows, it is policy that is seemingly supporting the move as much as the lack of inflationary impulse.
  • Bets that further rate cuts are imminent are supported by liquidity injections by the PBOC in November to the tune of CNY800bn.
  • A newly launched policy tool allows the Central Bank to conduct outright reverse repo transactions with a term of three months.
  • The cash injection is designed to ensure that funding pressures are manageable as the CNY6 trillion funding program for local are regional governments is in full swing.
  • On Friday the PBOC issued a separate statement advising that they had bought over CNY200 billion of government bonds in November with the announcement stating that ‘the policy was aimed at helping manage the banking system’s liquidity.’
  • The announcements and policy action has increased the focus on the potential for a further interest rate cut with traders positioning themselves accordingly.
  • In Monday’s trading China’s 10-year Government bond has approached 2.00% for the first time.
  • Government bond yields have been trending lower in recent months as inflationary trends moderate with the y/y inflation print for October at +0.3% and the producer price index in negative territory at -2.9%.
  • The move lower in bond yields now presents interesting dynamics for global bond investors.
  • For some Global investors, the attractiveness of China Government bonds was as much about the un-attractiveness of Japanese Government bonds.
  • Whilst short dated and intermediate maturities still see a meaningful premium for China yields over Japan, this recent move has seen the 30-year China yield slip below Japan’s for the first time in more than a decade.
  • Depending on how low China’s yields fall, this opens up new considerations for global investors in their relative value assessment in bond markets.
  • Based on today’s outright yield levels, the premium paid for China yields over Japanese yields in the 10-year maturity is 1.06%; down from the 5-year average of 1.426% and the 10-year average of 2.85%.
  • Global bond investors seek return, transparency and liquidity.  With the decline in the differential between the two markets happening at such a rapid pace, the move out of China government bonds by Global investors risks becoming rapid as the return story for some Global Investors may no longer drown out the transparency and liquidity differential between the two bond markets..   
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  • As China bond yields track towards new lows, it is policy that is seemingly supporting the move as much as the lack of inflationary impulse.
  • Bets that further rate cuts are imminent are supported by liquidity injections by the PBOC in November to the tune of CNY800bn.
  • A newly launched policy tool allows the Central Bank to conduct outright reverse repo transactions with a term of three months.
  • The cash injection is designed to ensure that funding pressures are manageable as the CNY6 trillion funding program for local are regional governments is in full swing.
  • On Friday the PBOC issued a separate statement advising that they had bought over CNY200 billion of government bonds in November with the announcement stating that ‘the policy was aimed at helping manage the banking system’s liquidity.’
  • The announcements and policy action has increased the focus on the potential for a further interest rate cut with traders positioning themselves accordingly.
  • In Monday’s trading China’s 10-year Government bond has approached 2.00% for the first time.
  • Government bond yields have been trending lower in recent months as inflationary trends moderate with the y/y inflation print for October at +0.3% and the producer price index in negative territory at -2.9%.
  • The move lower in bond yields now presents interesting dynamics for global bond investors.
  • For some Global investors, the attractiveness of China Government bonds was as much about the un-attractiveness of Japanese Government bonds.
  • Whilst short dated and intermediate maturities still see a meaningful premium for China yields over Japan, this recent move has seen the 30-year China yield slip below Japan’s for the first time in more than a decade.
  • Depending on how low China’s yields fall, this opens up new considerations for global investors in their relative value assessment in bond markets.
  • Based on today’s outright yield levels, the premium paid for China yields over Japanese yields in the 10-year maturity is 1.06%; down from the 5-year average of 1.426% and the 10-year average of 2.85%.
  • Global bond investors seek return, transparency and liquidity.  With the decline in the differential between the two markets happening at such a rapid pace, the move out of China government bonds by Global investors risks becoming rapid as the return story for some Global Investors may no longer drown out the transparency and liquidity differential between the two bond markets..