How Low Can China Bond Yield Go? 10-Year Rate Flirts With 3%

(Bloomberg) -- A yearlong rally in Chinese bonds has put a key level in sight.

The yield on China’s sovereign debt due in a decade was the closest to 3 percent in two years. It has stayed below that level for a sustained period only twice in the past 10 years or so, once during the financial crisis in late 2008 and again in 2016, when lenders racked up leverage and piled into bonds.

Sun Lu, a China strategist at Citigroup Inc., said 3 percent could be broken this quarter as the economy hits a bottom, factory inflation slows and the central bank may lower interest rates on medium-term loans for lenders. The trend should give the economy a boost as banks invest in corporate credit to offset lower returns from government bonds, she said.

“We still like government bonds and policy bank notes with long tenors,” Hong Kong-based Sun said. Some of her onshore clients see the 10-year yield falling as low as 2.5 to 2.6 percent in 2019.

China’s government bonds emerged as some of the world’s best performers in 2018, bucking analysts’ forecasts as the yield headed steadfastly downward. They’ve hit a slight speed bump of late though -- the yield just posted its first weekly rise in six weeks as traders took profit and equities rebounded. Still, bulls are confident that monetary easing by the People’s Bank of China will prompt a further advance.

“We will see rapid declines in the yields in the second half of this year,” said Ji Tianhe, a strategist at BNP Paribas in Beijing, who accurately predicted more gains in sovereign notes five months ago. Lower rates on the risk-free bonds will make it cheaper for companies and local authorities to seek financing through bond sales, he said.

China’s Bond Rally Is Starting to Fade, Policy Bank Notes Show

That doesn’t necessarily mean now is the best time to buy -- analysts are divided on when and even if the yield will hit 3 percent. Citic Securities Co.’s Ming Ming said it won’t occur before a rate cut, and that’s unlikely anytime soon. Qin Han, chief bond analyst at Guotai Junan Securities Co., said buying opportunities will emerge only when risk-on sentiment drives the debt market through a “significant adjustment” lasting until after April or May.

Jefferies Hong Kong Ltd. is more bearish, saying it’s worth switching to stocks from government bonds, as the bull run in the debt market will end this year with money supply hitting a bottom.

A possible surge in local authority debt sales in the first quarter could also lure some investors away from sovereign debt, Citi’s Sun said, though she added that this may create a buying opportunity.

The yield on 10-year government bonds rose one basis point to 3.15 percent on Monday, the highest level in three weeks. It has plunged 80 basis points over the past year.

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

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

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With assistance from Bloomberg