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MNI (London)
     BEIJING (MNI) - China's bond market is unlikely to see yields much lower in
the near-term, as concern over increased supply in Q2 overshadows positive news
to weigh on market sentiment.
     After a strong rally in the first quarter, yields on the 10-year China
Government Bond and China Development Bank Bond rose 1 and 3.6 basis points this
week.
     Bonds were driven higher in the first quarter, in large part by favourable
liquidity conditions. Liquidity will likely remain favourable throughout Q2 to
help facilitate the implementation of new regulation, but any benefit appears to
be already priced in.
     --REGULATORY CONCERNS
     Easing worries on regulation in the bond market have also contributed to
the Q1 downtrend in yields, but unless there are further announcements easing
regulatory conditions, it is unlikely to be a reason push yields lower.
     One factor seen weighing on the market in the second quarter is the
expected surge in Q2 issuance, particularly an increase in supply of local
government bonds. Overall net issuance of government and policy bank bonds in Q1
were lower than the same period last year for CNY146 billion, but the situation
is likely to change in Q2. 
     --INVESTOR UNEASE
     Some bond investors, especially those long-term ones like banks, still
appear cautious about the market. Despite the Q1 rally, many investors and
traders said trading profits were curtailed by cautious trading. The steepening
of the curve, helped by flows into the shorter end of the curve, underlined the
defensive trading strategies. The term spread between 1-year and 10-year CGB
widened from 9 basis points at the end of 2017 to 51 basis points on Thursday.
More bond supplies will potentially lead to upward pressures on primary market
rates, and then on secondary market yields.
     The market could rally, but it would need weaker-than-expected economic
conditions, falling credit demand, weakening of regulation policies and/or an
escalation of trade wars or other unexpected events weighing on risk appetite.
     Of those factors, both an escalation in the trade dispute between China and
the U.S. or a worsening of the situation over Syria could fuel a
flight-to-safety bond rally in quick order, with any subsequent slowing of the
economy further boosting bonds.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com
--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com
[TOPICS: M$A$$$,M$Q$$$,MR$$$$,M$$FI$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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