Surging Pork Prices May Mean Negative Real Yields in China
Soaring pork prices in China are walloping the country’s inflation-adjusted bond yields, now in danger of turning negative for the first time in seven years.
Home to half of the world’s hogs, China’s been hit hard by African swine fever -- more than 200 million pigs have been culled this year. That’s sent the price of pork, a key element in Chinese cuisine, soaring and in turn drove the consumer price index to breach 3% gains in September. Given the 3.22% yield on 10-year government bonds Monday, the highest since July 1, that means a mere 0.2% return for bondholders after accounting for inflation.
While extraordinarily low yields -- adjusting for inflation or not -- have become the norm across the developed world, it’s rare in emerging markets. By contrast with China, South Korea’s 10-year bonds offer 2% real yields. Bondholders in India are getting more than 2.5% after accounting for inflation running at almost 4%.
And unlike the U.S., Japan and other issuers, China’s government doesn’t sell inflation-linked bonds, which boost returns to investors in lockstep with a gauge of consumer prices. That leaves domestic investors bearing the full brunt of the loss in purchasing power from the latest surge in inflation. And they’re likely to take the pain without demanding greater compensation, market participants say.
“The bond market understands that this is purely supply, it’s not a general wage inflation or inflation in the economy,” said Edmund Ng, chief investment officer at Eastfort Asset Management, who previously worked at the Hong Kong Monetary Authority. “The African swine fever will not last forever.”
Click to read about China’s record slump in pork output
Indeed, National Bureau of Statistics spokesman Mao Shengyong said Friday that pork prices should gradually return to a “normal range,” and played down concerns about inflation. China has worked to restart domestic production by increasing subsidies and loans to help hog breeding. But it may take time to pull down costs -- Bloomberg Economics estimated last month that inflation may surpass 3.5% by December.
A decade ago, trends in China’s bond yields tended to coincide with those for inflation, but that link diminished around 2012-13, when the economy decisively put the years of double-digit expansion behind. Investors strengthened their focus on policy makers’ intentions. Now, the assumption is that the People’s Bank of China will look past the pork-induced inflation.
Mao also said there is “ample space” for monetary policy to support economic growth, just as third-quarter data showed the slowest expansion since the early 1990s.
“Just looking at the pigs, it’s a serious problem, but it isn’t to the extent of panic,” said Li Haitao, deputy director of fund investment at Hexa AMC. “The market is more concerned about other macro factors,” Li said. He expects the bond market to range-trade in the fourth quarter, after 10-year yields stayed within a 3% to 3.44% band this year.
©2019 Bloomberg L.P.