China’s sovereign bond yields surged to their highest levels this year, influenced by investor sentiment around anticipated fiscal expenditures potentially stimulating economic growth while postponing interest rate cuts.
Bond Yield Surge
Yields on China’s 10-year government bonds increased by over 10 basis points on Monday, reaching 1.865%. This marks a significant rise from January’s record lows, with the 30-year sovereign bonds exceeding 2% for the first time, hitting 2.030%. Yields on one-year notes also climbed, gaining 10 basis points to 1.643% by the early afternoon in Beijing.
Market Reactions
The uptick in yields follows a rally in the Chinese offshore stock market, indicating a redistribution of liquidity towards more investment-friendly assets. As Frederic Neumann, chief Asia economist at HSBC, conveyed, “Growth optimism has returned in China,” referencing indications from the National People’s Congress for a more aggressive pro-growth strategy focused on fiscal easing.
Investor sentiment towards Chinese bonds has shifted noticeably since January, driven by optimism about economic potential catalyzed by a recently declared growth target of around 5% set by government officials.
Increased Fiscal Measures
Beijing’s fiscal budget has been revised upwards, now targeting a deficit of 4% of GDP—the most substantial figure since at least 2010. Additionally, the Chinese government plans to release 1.3 trillion yuan ($178.9 billion) in long-term special treasury bonds in 2025, representing an increase of 300 billion yuan compared to last year.
Raising bond issuance generally decreases the attractiveness of existing bonds, resulting in lower prices and higher yields, a trend that appears set to continue if trade tensions with the U.S. escalate.
Interest Rate Expectations
The expectation for imminent interest rate reductions has diminished as the People’s Bank of China (PBOC) has made clear its commitment to stabilizing the yuan amidst rising trade tensions with Washington. Central bank Governor Pan Gongsheng expressed at a recent press conference that the bank would introduce liquidity measures “at an appropriate time,” reinforcing the priority on currency stability.
Despite this, the Chinese offshore yuan fell roughly 0.24% on Monday, traded at 7.2588 against the U.S. dollar. Rising bond yields are helping to counterbalance depreciation pressures, particularly relative to decreasing U.S. yields, which have plummeted over 50 basis points since January.
Shifting Investment Sentiment
The recent bond selloff aligns with a rising interest in equities, spurred by the emergence of the AI startup DeepSeek, which has attracted substantial foreign investment. Carlos Casanova, senior economist for Asia at UBP, noted that “Investor sentiment has become more bullish following the re-rating in offshore equities… leading to a favoring of stocks over government bonds.”
The MSCI China index has risen nearly 20% this year, outperforming the global market with the Hong Kong-listed Hang Seng Index also showing impressive gains of over 18% year-to-date.
In conclusion, as the financial landscape evolves, investors are navigating through changing tides in bond yields, economic expectations, and a strategic pivot towards equities, reflecting a broader trend in market sentiment and economic policy outlooks.
