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Uncertainty Pushes 10Y Yield Below 2.80% Support

CHINA
  • China LT bond yield has been trending lower in the past week even though inflationary pressures continue to remain elevated.
  • The 10Y yield broke below its 2.80% key support last week, which represents the 61.8% Fibo retracement of the 2.46% - 3.36% range.
  • One major explanation for the compressed term structure has been the rise in Covid uncertainty with the discovery of new variant ‘Omicron’.
  • As China maintains a ‘zero-Covid’ policy, the discovery of a new variant could result in renewed restrictions/local lockdowns imposed by the governments and therefore lowers growth expectations.
  • Interestingly, the market does not seem to be ‘convinced’ by the recent easing measures announced by China officials, and therefore the elevated uncertainty continues to push preference for ‘risk-off’ assets such as government bonds.
  • Hence, investors have started to question for how long China will be able to keep up its zero-Covid strategy.

Source: Bloomberg/MNI

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