Divergence Between Real M1 Money Growth and 10Y Yield Keeps Rising

• In the past few months, we have seen that the divergence between China real M1 money growth and the 10Y bond yield, which have co-moved strongly in the past 15 years, has been constantly rising.
• Since the start of the year, bond investors globally have been more concerned about the rising uncertainty over the Delta variant and the deceleration in the economic activity, which explains why LT bond yields have remained low in most of the DM and EM economies given the high level of inflation.
• Even though the divergence between the two times series has surprised some market participants, we think that it could persist in the medium term in the current environment.
• We previously saw that China real M1 YoY has historically acted as a strong leading liquidity indicator for EM risky assets (6M Lead), especially cyclical stocks such as financials.
• Hence, if real M1 remains very low (due to both decreasing money supply and rising inflationary pressures), investors would prefer risk off assets (such as government bonds) to cyclical stocks, pushing LT bonds yields to new lows.
• Key support to watch on China 10Y yield stands at 2.80%, which corresponds to the 61.8% Fibo retracement of the 2.46% - 3.36% range (2020 / 20201 low high).

Source: Bloomberg/MNI