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China’s Yields Jump to Three-Month High as Easing Bets Dwindle

China’s Yields Jump to Three Month High as Easing Bets Dwindle

China’s 10-year bond yield rose to the highest in three months as comments from central bank officials prompted traders to roll back some policy easing bets.

The yield on China’s 10-year bond rose as high as 3.05%, crossing the 3% level for the first time since early July. Bond futures fell by the most in two months. Sun Guofeng, head of the monetary policy department at the People’s Bank of China, said Friday authorities will use medium and short-term tools to manage liquidity, without mentioning the possibility of a reduction in lenders’ reserve requirement ratio.

“China government bond yields rose due to weakening market conviction on reserve requirement ratio cuts,” said Kiyong Seong, a strategist at Societe Generale in Hong Kong. The nation’s eroding fundamentals may sustain a possibility of RRR cut or at least ample liquidity provision, he said, adding that yields could stabilize slightly below 3%.

China’s Yields Jump to Three-Month High as Easing Bets Dwindle

China’s economy slowed more than expected in the third quarter weighed by the slump in the property market and an energy crisis. Still, the People’s Bank of China has been reluctant to add additional cash into the banking system this month in a sign it’s wary of taking policy action that could fuel inflation.

Guofeng also said on Friday that inflation risk is “controllable”. Zou Lan, another PBOC official said risks from China Evergrande Group are unlikely to spread.

Goldman Sachs Group Inc. economists said they no longer expect China to cut the amount of cash banks must hold in reserve this year after the central bank pledged to keep overall liquidity conditions relatively stable. It could rely on its open market operations and medium-term lending facility instead to manage liquidity fluctuations, they said.

Global Selloff

The rise in China’s bond yields comes amid a global bond selloff as rising inflation bolsters rate-hike bets. Prior to that China’s yields were anchored on hopes of another cut in banks’ reserve requirement ratio following a surprise reduction in July. The yield spread between China’s 10-year bonds and similar-tenor Treasuries has widened after narrowing earlier this month to the least since February 2020.

“China yields have been relatively insulated from global yields movement with its own local dynamics,” Seong said. Domestic factors will remain key determinants in China rates and the yield differential with the U.S. could narrow further, he said.

©2021 Bloomberg L.P.