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CHINA: Could CGB Yields Trade Inside JGB Yields in 2025?

CHINA
EM BulletAPACChinaEmerging Market NewsBulletMarketsFixed Income BulletsForeign Exchange Bullets
  • In recent weeks policy expectations in China have begun to shift rapidly as we enter the third successive month where new initiatives are announced.
  • Following the announcement of the CNY10tn increase in the debt ceiling for regional / local government issuance, bond yields have moved lower.
  • In November this year, markets saw 30YR yields in China converge with 30YR yields in Japan. 
  • China’s CPC Central Committee’s resetting this week of the ‘tone for monetary policy’ from prudent to ‘moderately loose’ could have two direct impacts on China bond demand going forward.
  • It is anticipated that the next policy move (following the change in tone) will be a reduction in the RRR, releasing up to CNY3tn of liquidity into the system.
  • It is also anticipated that further rate cuts will be forthcoming, but likely next year's story.
  • Next week sees the 1-YR Medium-Term Lending Facility Rate announcement where sentiment is still for no change currently, confining rate cuts seemingly to 2025.
  • Rate cuts and RRR reductions will increase liquidity in the system, with it reasonable to assume that the bond market should be a beneficiary of these actions.
  • Additionally, the PBOC is to start its own government bond trading activities in 2025 and is expected to be a net buyer of securities to further support liquidity.
  • Relative to other major markets globally, the China Government bond curve slope is still positive (China 2s10s +55bps, Japan 2s10s +48bps, India 2s10s +8bps, US 2s10s +11bp).
  • The positive slope of the CGB curve is known to be something the PBOC is willing to protect as it is a sign of the general health of an economy.
  • In November we published an article titled “China Government Bonds:  The Case for the Un-Correlated” where our research pointed to the China Government Bond markets low correlation to the US, with other benefits being the yield pickup (relative to other Government Bonds markets, specifically Japan) and diversification benefits.  
  • The move in tone from authorities now changes the trajectory for the yield pickup (specifically CGBs vs JGBs) in 2025.
  • The likely injection of liquidity via RRR cuts, PBOC trading bonds and monetary policy reductions are likely to dwarf the increase in issuance from regional governments (under the increased deficit caps), driving yields lower.
  • To protect the positive sloping curve, there is the potential for a more aggressive monetary policy stance.
  • This could have the dual outcome in that over the course of 2025, the yield differential that CGBs enjoy over JGBs could disappear, both at the front end and 10YR maturity.
  • China is now the 2nd-largest player in the FTSE WGBI (one of the most commonly used benchmarks globally), overtaking Japan as bond issuance and currency shifts reshape the market.  (source: LSEG)
  • The inclusion of Chinese bonds in the FTSE WGBI marks a major shift, offering more diversified options for global investors.
  • Higher forecast net issuance means the market weights of both Japan and China in the WGBI should increase, thereby making the decision about relative value all that more important for investors going forward. 
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  • In recent weeks policy expectations in China have begun to shift rapidly as we enter the third successive month where new initiatives are announced.
  • Following the announcement of the CNY10tn increase in the debt ceiling for regional / local government issuance, bond yields have moved lower.
  • In November this year, markets saw 30YR yields in China converge with 30YR yields in Japan. 
  • China’s CPC Central Committee’s resetting this week of the ‘tone for monetary policy’ from prudent to ‘moderately loose’ could have two direct impacts on China bond demand going forward.
  • It is anticipated that the next policy move (following the change in tone) will be a reduction in the RRR, releasing up to CNY3tn of liquidity into the system.
  • It is also anticipated that further rate cuts will be forthcoming, but likely next year's story.
  • Next week sees the 1-YR Medium-Term Lending Facility Rate announcement where sentiment is still for no change currently, confining rate cuts seemingly to 2025.
  • Rate cuts and RRR reductions will increase liquidity in the system, with it reasonable to assume that the bond market should be a beneficiary of these actions.
  • Additionally, the PBOC is to start its own government bond trading activities in 2025 and is expected to be a net buyer of securities to further support liquidity.
  • Relative to other major markets globally, the China Government bond curve slope is still positive (China 2s10s +55bps, Japan 2s10s +48bps, India 2s10s +8bps, US 2s10s +11bp).
  • The positive slope of the CGB curve is known to be something the PBOC is willing to protect as it is a sign of the general health of an economy.
  • In November we published an article titled “China Government Bonds:  The Case for the Un-Correlated” where our research pointed to the China Government Bond markets low correlation to the US, with other benefits being the yield pickup (relative to other Government Bonds markets, specifically Japan) and diversification benefits.  
  • The move in tone from authorities now changes the trajectory for the yield pickup (specifically CGBs vs JGBs) in 2025.
  • The likely injection of liquidity via RRR cuts, PBOC trading bonds and monetary policy reductions are likely to dwarf the increase in issuance from regional governments (under the increased deficit caps), driving yields lower.
  • To protect the positive sloping curve, there is the potential for a more aggressive monetary policy stance.
  • This could have the dual outcome in that over the course of 2025, the yield differential that CGBs enjoy over JGBs could disappear, both at the front end and 10YR maturity.
  • China is now the 2nd-largest player in the FTSE WGBI (one of the most commonly used benchmarks globally), overtaking Japan as bond issuance and currency shifts reshape the market.  (source: LSEG)
  • The inclusion of Chinese bonds in the FTSE WGBI marks a major shift, offering more diversified options for global investors.
  • Higher forecast net issuance means the market weights of both Japan and China in the WGBI should increase, thereby making the decision about relative value all that more important for investors going forward.