Deterioration in Economic Data Keeps Supporting Government Bonds

• In the past few months, we have seen that despite the strong inflationary pressures in both EM and DM economies, government LT bond yields have been reaching new lows amid rising uncertainty over a range of risk factors ('Delta' variant, contraction in Chinese liquidity).
• In China, the 10Y bond yield has been gradually declining since its peak of 3.36% reached in November 2020, which also coincides with the peak of Chinese liquidity, which compute as the annual change in the Total Social Financing 12M Sum.
• Interestingly, the chart below also shows a strong co-movement between China 10Y yield and the Citi economic surprise index in the past few years.
• The significant deterioration in economic data recently following the government's decision to reintroduce lockdowns to prevent the virus from spreading could have been one of the major factors driving LT bond yields lower.
• This morning, we saw that the Caixin Services PMI came in significantly lower than expected at 46.7 in August (vs. 52 exp.), down from 54.9 the previous month, confirming the sharp deceleration in the economic activity.
• Key support to watch on the downside on China 10Y yield remains at 2.80%, which corresponds to the 61.8% Fibo retracement of the 2.46% - 3.36% range. A break below that level would open the door for a move down to 2.71% (June 15 2020 low).

Source: Bloomberg/MNI