More Pain Ahead for China Bonds After 10-Year Yield Breaches 4%

(Bloomberg) -- China’s sovereign bond selloff escalated Tuesday, with the 10-year yield topping 4 percent for the first time in three years. The breach is likely to sour sentiment further and lead to more losses, at least until the Chinese authorities step in, analysts said.

Here’s a breakdown of their comments:

David Qu, market economist at Australia & New Zealand Banking Group Ltd. in Shanghai

• “The breaking of 4 percent will have significant negative impact on sentiment. There’s a chance that we will see an extensive and quick slump in bonds in the near term.”
• The selloff will spread to corporate bonds if sentiment worsens. 
• Worse-than-expected monetary and real economic data didn’t help bonds, which shows the market is losing confidence.
• Investors should expect tougher financial regulations and tighter monetary policy next year, so bond yields will keep climbing.

Li Qilin, chief macroeconomic researcher at Lianxun Securities Co. 

• The breach of 4 percent may trigger a new round of stop-loss trades and drive the 10-year yield up, though it’s hard to predict how high.
• The peak depends on whether authorities announce some supportive policies to calm the market and whether banks start buying bonds. 
• Banks don’t currently have money to allocate to sovereign bonds because they are under pressure to buy local government debt and deposit growth has been slow due to the popularity of investment alternatives such as Yue Bao.

Chris Leung, senior economist at DBS Bank Hong Kong Ltd.

• “If deleveraging continues as Xi stated in the party congress, then bond yields will climb further.” 
• “With financial firms’ liabilities shrinking, and outstanding WMPs (wealth-management products) falling, the allocation or the demand to allocate to government bonds will shrink, weighing on prices.”

Liu Dongliang, senior analyst at China Merchants Bank Co. in Shenzhen.

• China bonds will remain weak but there may not be an acceleration of declines after the break of 4 percent, as a “mental line of defense” was broken when the yield hit 3.9 percent. 
• Investors were expecting it to rise to 4 percent.
• “The market is still worried about tougher financial regulation and tighter year-end liquidity.”

Zhang Guoyu, analyst at Tebon Securities Co. in Shanghai

• The 10-year yield should be capped at 4.1%.
• Authorities aren’t likely to let the rate climb fast as that would increase corporate funding costs and put pressure on the real economy, which is against the aim for stable growth. 
• If there’s another round of panic selling, the central bank will likely add liquidity to the market to stabilize it and prevent a rapid pickup in yields.

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net, Emma Dai in Hong Kong at edai8@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, Robin Ganguly

©2017 Bloomberg L.P.

With assistance from Tian Chen, Emma Dai, Helen Sun