China Sovereign Bond Rout Accelerates as Central Bank Stays Pat

(Bloomberg) -- Investors in China’s sovereign-debt market are increasingly concerned the central bank won’t be easing policy aggressively any time soon.

The country’s bonds resumed their declines Thursday after the central bank was seen withdrawing some $28 billion by letting its medium-term loans to banks mature. The benchmark 10-year government yield was at an almost two-month high, with the debt nearing a technical indicator that has in the past signaled the sell-off has gone too far.

The good news is that a relative-strength index above 70 for the yield has in the past two years preceded a rebound for the notes. When that signal was triggered in October, the ensuing rally sent the 10-year bond yield to its lowest since 2002 only five months later.

China’s sovereign notes have come under pressure in May, with banks switching to higher-yielding local government bonds as Beijing increases issuance to help pay for fiscal stimulus. Lenders, who buy most of that debt, may need to find as much as 1.77 trillion yuan ($249 billion) this month for the purchases, as well as other needs.

The relative-strength index for the yield on government bonds due in a decade rose to 67 on Thursday, near the 70 level suggesting to some traders the debt is oversold. The rate on the notes has climbed 20 basis points in May after falling for six straight months.

The yield on the notes rose 4 basis points to 2.72% as of 12:24 p.m. in Shanghai.

©2020 Bloomberg L.P.