China’s 10-Year Bond Yield Falls to 3% for First Time Since 2016

(Bloomberg) -- China’s 10-year sovereign bond yield fell to 3% for the first time since 2016, joining a global rally of government debt as the nation’s economy slowed and its trade dispute with the U.S. worsened.

The yield on the country’s most-active notes due in a decade fell 1 basis point to briefly trade at 3% in Shanghai. Escalations in the trade war since April have put a damper on sentiment in equities, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt, which hadn’t touched 3% since November 2016, is down about 40 basis points since its April peak.

The advance in Chinese bonds followed a rally in their U.S. counterparts, as the yields on American long-end debt approached an all-time low overnight amid rising global trade concerns, political upheaval in Hong Kong and a crisis in Argentina. China’s economy also showed fresh signs of slowing, with data released on Monday suggesting the nation’s credit demand tumbled to the second-lowest amount this year in July.

"The drop in the yield is probably a result of the rally in U.S. government bonds and the disappointing credit data," said Wu Sijie, a senior trader at China Merchants Bank Co. "The room for the decline is limited if China doesn’t lower rates for its medium-term lending facility."

The yield on the 10-year sovereign note was at 3.01% Tuesday afternoon in Shanghai. The returns still stand out just as the world’s stockpile of negative-yielding bonds nears $16 trillion for the first time.

China’s Lowest Bond Yields Since 2016 Look Really Juicy to Some

China’s sovereign bonds lagged a global rally in recent months with one of the worst performances among the world’s biggest debt markets. Even as weak economic data strengthened the case for further stimulus, concern over credit risks after the government takeover of a lender were among the reasons seen deterring investors.

The bull case for Chinese bonds is pegged on potential easing by China’s central bank and an increase in foreign flows helped by their inclusion in global indexes. But risks include a potentially wild yuan, which makes assets denominated in the Chinese currency less attractive to overseas investors. An escalation of the trade war could send the yuan to as low as 7.7 per dollar, according to Societe Generale SA.

China’s stimulus plans may also disappoint bond bulls -- the People’s Bank of China signaled Friday it will hold back from deploying large-scale measures for now.

Stocks fell across Asia on Tuesday and bonds rallied as investors shunned risk assets. Hong Kong’s deepening political crisis -- which now risks becoming an economic one -- and fears of another default in Argentina are adding to the concern over global growth.

“The world is in risk-off mode due to rising geopolitical tensions globally, and the Hong Kong unrest is part of the puzzle affecting the sentiment," Tommy Xie, economist at Oversea-Chinese Banking Corp. in Singapore. It’s a good time to buy Chinese government bonds at the moment, he added.

Here’s what some fund managers say:

Pengyang Asset Management Co. (Yang Aibin, portfolio manager)

• China’s bond rally isn’t over yet and the 10-year government bond yield may still challenge the 2016 low of around 2.65%
• The downward trend that pushed the yield down to 3% is mainly being driven by global trade concerns and China’s slowing credit growth

Hexa AMC (Li Haitao, deputy director of fund investment)

• We expect further upside in China’s bond market
• The 10-year yield will likely retreat to around 2.75% to 2.85% by the end of the year

HFT Investment Management Co. (Yiping Chen，deputy head of fixed-income investment)

• The current yield for 10-year sovereign notes is still relatively high given the general economic environment
• We expect it to fall further as the Chinese bond yield’s slide was "tiny" compared with U.S. Treasuries and other global debt

To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Claire Che in Beijing at yche16@bloomberg.net;Xize Kang in Beijing at xkang7@bloomberg.net;Jing Zhao in Beijing at jzhao231@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sofia Horta e Costa, Magdalene Fung

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With assistance from Bloomberg