Uncertainty Sends 10Y Yield Lower Despite Rising Inflationary

• One spectacular observation that has occurred in the past few weeks has been the significant divergence between China inflation, which we measure as the annual change in PPI, and the 10Y bond yield.
• While inflationary pressures have continued to intensify in the EM market, China long-term bond yields have been falling (following the global trend) as uncertainty about the economic recovery has been surging.
• We previously saw that Chinese economic activity has been decelerating since February according to a range of economic and financial indicators (i.e. Li Keqiang index…).
• As a result, Chinese authorities recently cut the required reserve ratio by 50bps for most banks in order to stimulate the economy activity and potentially weaken the CNY against major crosses.
• It will be interesting to see the impact that the divergence in monetary policy between China and the rest of the World will have on markets in the near to medium term.

Source: Bloomberg/MNI