China’s bond market saw a surge in activity on Monday as the yield on the 10-year government bond dipped below 2% – its lowest level in more than two decades, offering up strong indications that Beijing might intensify its efforts to prop up the nation’s economy.
Data from LSEG revealed that the yield on China’s 10-year government bond – which moves inversely to prices – plummeted to 1.9636%, registering a substantial drop in over 22 years. Simultaneously, the yield on the 30-year bond also experienced a decline to 2.164%.
The offshore yuan weakened against the dollar on Monday, slipping 0.45% to 7.2795. In contrast to this, China’s 10-year yield is far lower than the U.S. 10-year Treasury yield, which is over 4%.
This bond rally is largely attributed to predictions of further curtailment of the reserve requirement ratio for commercial lenders. Supporting this are favourable liquidity conditions and persistently weak economic fundamentals.
Following the announcement by the People’s Bank of China (PBOC) last Friday of industry-injecting liquidity to the tune of 800 billion yuan via ‘outright reverse repo operation’, the decline in yields intensified. This injection was an increase from the 500 billion yuan committed in October. As communicated officially by the PBOC, this resolute move was initiated to sustain liquidity in the system at an acceptable level.
The PBOC also divulged its net purchase of 200 billion yuan of government bonds in the open market operations of November as part of its counter-cyclical adjustment.
With slow economic growth and limited attractive investment options, investment is increasingly flooding into the safety of Chinese government bonds. Concerned over the risk associated with destabilizing bubbles as investors flock towards government bonds while evading more unstable assets, the Central Bank warned the market players.
