China’s 10-year yield falls to decades low on rate cut hopes

“The pressure is definitely for yields to go lower” due to expectations for an interest rate cut, said Woei Chen Ho, economist at United Overseas Bank. — Bloomberg

BEIJING: China’s benchmark government bond yield fell to its lowest in nearly 22 years on mounting expectations for further monetary easing amid a fragile economic recovery and stock market sell-off.The yield on the 10-year sovereign note slipped to 2.47%, a level unseen since 2002.

The world’s second-largest economy is suffering from an extended housing slump, and its stock market is under pressure from weak investor sentiment, leading to calls for policymakers to deploy more monetary stimulus to boost growth.

Demand for haven assets is on the rise amid expectations that the economy will continue to be pressured by weak consumption and the property downturn.

Beijing is already starting to loosen its monetary policy in a more aggressive way, as it surprised the market by cutting the amount of cash banks need to set aside as reserves last week.

“The pressure is definitely for yields to go lower” due to expectations for an interest rate cut, said Woei Chen Ho, economist at United Overseas Bank.

“For longer-term yields, the market is also pricing the expectation that growth in the coming years will settle into a lower range.”

While concerns about currency volatility and uncertainty over when the Federal Reserve would start cutting US interest rates are considered to have limited the People’s Bank of China’s (PBoC) room for easing, it last week noted signs of an impending pivot stateside.

The narrowing of divergent policies between the world’s two largest economies “will expand space for China’s monetary policy operations,” PBoC governor Pan Gongsheng said, adding that the nation’s financial risks are manageable.

“Market expectation for a rate cut in February is gaining traction, especially after the PBoC’s surprising announcement to cut the reserve-requirement ratio,” said Ming Ming, chief economist at Citic Securities.

China’s government bonds have outperformed in a global debt sell-off, with the 10-year yield down eight basis points since the start of the year.

The US Treasury equivalent is up almost 20 basis points.

Amid a slew of steps to bolster sentiment, Beijing has also pledged to open up its bond trading toolbox to overseas investors this month, a move that should expand the universe of potential buyers. — Bloomberg