China Bond Yield Drops to Record Low as Growth Concerns Persist

(Bloomberg) -- China’s sovereign bonds rallied this week, with the 10-year yield declining to a record low, amid concern that property market curbs and moves to reduce leverage in the financial system will weigh on economic growth.

The yield on government bonds due in a decade fell as much as two basis to 2.635 percent in Shanghai. That’s the lowest level since Bloomberg started compiling ChinaBond data in 2006.

Policy makers have extended the tenors of money-market lending tools, spurring speculation that they want to curb excessive use of leverage in debt investments. Financial regulators plan to tighten control on funds flowing into the property market, according to people familiar with the matter. While data this week showed economic growth meeting expectations, industrial output for September missed estimates. Sentiment on China has also been affected by the yuan’s drop to a six-year low, which has raised concern of capital outflows.

“It’s still a matter of debate whether economic fundamentals have turned better, despite the improving data,” said Luo Yunfeng, a fixed-income analyst at Essence Securities Co. “It’s possible that, some time next year, the economy might show some sort of weakness again.”

The PBOC pumped in a net 120 billion yuan ($17.8 billion) in open-market operations Friday, taking injections in the past two days to 240 billion yuan, the most in a month. The central bank added a net 95.5 billion yuan this week, after interbank liquidity tightened following the biggest daily withdrawal in three weeks on Monday.

The overnight repurchase rate, a gauge of interbank funding availability, rose 18 basis points this week to 2.31 percent, the highest this month, as of 5:24 p.m. in Shanghai. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, climbed seven basis points this week to a five-month high of 2.63 percent, data compiled by Bloomberg show.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Sarah McDonald

With assistance from Helen Sun