Rout of China’s Bonds Worsens Amid Concerns on Surge in Issuance

(Bloomberg) -- A sell-off in China’s sovereign notes worsened Monday, with the benchmark 10-year yield surging to its highest level since March, amid concerns that investors may switch to local-government bonds for better returns.

The yield on sovereign notes due in a decade jumped as much as seven basis points to 2.68%. Sales this month of local government bonds are expected to climb to a record high of more than $141 billion. The supply has raised concerns that commercial banks, the largest holders of sovereign notes, may shift some funds to debt sold by regional authorities for their higher returns.

“The sell-off on long-end sovereign notes has become very crowded today” amid the supply worries, said Xing Zhaopeng, an economist at Australia and New Zealand Banking Group Ltd. in Shanghai. “The 10-year yield will rise to as high as 2.8% within the coming 10 sessions and then stabilize. That will be a good opportunity for investors to buy the debt as the central bank will continue to ease.”

China’s 10-year sovereign yield has climbed 13 basis points the past four sessions following a holiday break, and the country’s government bonds are Asia’s second-worst performer for May behind Indonesia. Risk appetite is also creeping back, further pressuring the fixed-income market, amid some better-than-expected economic data and signs the coronavirus outbreak is easing in China.

But longer term, Beijing’s loosening monetary policy could support sovereign bonds. On Sunday, the People’s Bank of China said in a report that it would resort to “more powerful” policies to aid economic growth.

The 10-year yield fell 56 basis points in the first three months of this year, the biggest quarterly decline since the end of 2008. Currently at 2.64%, the yield is 16 basis points above the 18-year closing low set in April.

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