MNI China Money Week: Upcoming Supply To Weigh On Bond Market

     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

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