China’s sovereign bond yields have surged, reaching their highest levels this year, as investors adjusted their portfolios in light of anticipated fiscal measures aimed at economic growth. On Monday, the yield on China’s 10-year government bond rose over 10 basis points to 1.865%, marking a significant increase from the record lows of January.
Yield Trends and Market Reactions
In addition to the 10-year bonds, yields on 30-year sovereign bonds surpassed the psychological threshold of 2%, climbing to 2.030%. Even the one-year note experienced a 10-basis-point rise, pushing its yield to 1.643%. By early afternoon in Beijing, there was a slight pullback in these yield gains.
Frederic Neumann, chief Asia economist at HSBC, noted that “growth optimism has returned in China,” as evidenced by the National People’s Congress signaling a robust pro-growth position, primarily through fiscal easing.
The bond yields have rebounded from historic lows amid renewed optimism regarding the Chinese economy, following an ambitious growth target of approximately 5%, announced during a recent government work report. Furthermore, the government has revealed plans to increase its fiscal budget deficit to 4% of GDP, the highest rate since 2010, alongside issuing 1.3 trillion yuan (about $178.9 billion) in ultra-long-term special treasury bonds.
Impact of Increased Bond Supply
An uptick in bond issuance generally renders existing bonds less appealing, leading to lower prices and higher yields. According to Ju Wang of BNP Paribas, if trade tensions with the U.S. escalate, bond supply may increase further.
“There is still room for long-end rates to correct further due to expected issuance of long-dated bonds,” Wang remarked. This aligns with government initiatives aimed at bolstering the property market and stimulating consumption amidst a continuing equity rally.
Interest Rate Cut Expectations Adjusted
With the People’s Bank of China (PBOC) reiterating its focus on stabilizing the yuan, investor expectations for imminent interest rate cuts have diminished. Central bank Governor Pan Gongsheng emphasized that while cuts are anticipated, maintaining currency stability remains a priority.
This sentiment indicates a cautious approach, particularly as the PBOC seeks to prevent rapid depreciation of the yuan ahead of potential trade negotiations. On Monday, the Chinese offshore yuan traded lower against the U.S. dollar, reflecting external pressures.
Neumann points out that “increasing bond yields in China provide a counterbalance to depreciation pressure on the Renminbi, especially as U.S. yields decline.”
Shifting Investor Sentiment
The bond sell-off was prompted by a corresponding rally in the Chinese offshore stock market, indicating a liquidity shift towards riskier assets. The emergence of companies like the AI startup DeepSeek has encouraged global investors to increase their stakes in Chinese stocks, betting on the sector’s growth.
According to Carlos Casanova, a senior economist at Union Bancaire Privée, “Investor sentiment has become more bullish following the re-rating in offshore equities triggered by DeepSeek,” leading to a preference for equities over government bonds.
The MSCI China index has surged nearly 20% this year, highlighting positive trends in the stock market, while the Hong Kong-listed Hang Seng Index has excelled, outperforming many of its global counterparts with an impressive 18% increase year-to-date.
