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CHINA: Yesterday’s Move Short Lived. 

CHINA
EM BulletAPACChinaEmerging Market NewsBulletMarketsFixed Income BulletsForeign Exchange Bullets
  • The endless move lower in yield took a break yesterday with China’s 10YR yield backing up +3.5bp.
  • News broke that the PBOC had held meetings with key institutions that were known to be aggressive buyers of bonds, supposedly driving the bull market.
  • The purpose of the meeting it is believed was to remind participants of good practices, the need to back all decisions by sound research and understanding of interest rate differentials.
  • The PBOC has attributed perceived ‘aggressive trading’ as part of the issues with the current rally.
  • The news struck a chord with markets yesterday with the CGB10YR rising +3.5bps on the day.
  • The PBOC’s actions are consistent with their actions of recent months in reminding participants as to proper behaviour, yet the impact is limited.
  • The source of the bond rally stems from a multi-year decline in the property sector, the dominant sector for investment in China, coupled with volatility in equity markets.  
  • This has led to asset allocation to bonds.
  • This asset allocation comes at a time of slowing growth, interest rate cuts and liquidity support for markets – all of which are supportive of bonds also.
  • The move by the PBOC appears to be more of a reminder to adhere to appropriate practices, rather than an attempt to de-rail the bond rally.
  • With an estimated CNY10bn of new issuance expected in the near term, and the potential for much more than that to follow, lower yields may not necessarily be a bad thing.
  • Yesterday’s warning has seemingly had fleeting success in stemming the rally because as globally bond yields are taking a lead from the move higher in the US overnight, bond yields not participating in the selloff in China with yields virtually unchanged across the curve. 

 

  • CGB 2YR 1.158%,     CGB 5YR 1.447%,     CGB 10YR 1.767%,     CGB 30YR 2.003%.
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  • The endless move lower in yield took a break yesterday with China’s 10YR yield backing up +3.5bp.
  • News broke that the PBOC had held meetings with key institutions that were known to be aggressive buyers of bonds, supposedly driving the bull market.
  • The purpose of the meeting it is believed was to remind participants of good practices, the need to back all decisions by sound research and understanding of interest rate differentials.
  • The PBOC has attributed perceived ‘aggressive trading’ as part of the issues with the current rally.
  • The news struck a chord with markets yesterday with the CGB10YR rising +3.5bps on the day.
  • The PBOC’s actions are consistent with their actions of recent months in reminding participants as to proper behaviour, yet the impact is limited.
  • The source of the bond rally stems from a multi-year decline in the property sector, the dominant sector for investment in China, coupled with volatility in equity markets.  
  • This has led to asset allocation to bonds.
  • This asset allocation comes at a time of slowing growth, interest rate cuts and liquidity support for markets – all of which are supportive of bonds also.
  • The move by the PBOC appears to be more of a reminder to adhere to appropriate practices, rather than an attempt to de-rail the bond rally.
  • With an estimated CNY10bn of new issuance expected in the near term, and the potential for much more than that to follow, lower yields may not necessarily be a bad thing.
  • Yesterday’s warning has seemingly had fleeting success in stemming the rally because as globally bond yields are taking a lead from the move higher in the US overnight, bond yields not participating in the selloff in China with yields virtually unchanged across the curve. 

 

  • CGB 2YR 1.158%,     CGB 5YR 1.447%,     CGB 10YR 1.767%,     CGB 30YR 2.003%.