(Bloomberg) -- Traders are snapping up China’s five-year government bonds, attracted by the lower risk of central bank intervention for this maturity.
Yields declined nearly five basis points to 1.68% on Wednesday, set for a record low, according to data compiled by Bloomberg going back to 2002. The five-year bonds have seen net inflows every month this year, except in August, the data show.
The trend highlights persistent demand, particularly in the middle of the yield curve, and coincides with this week’s stimulus measures, which have pushed up the Chinese yuan and stocks. The five-year bonds are in “the sweet spot” with lower intervention risk compared to longer-tenor debt, said Janice Xue, Asia FX strategist at BofA Global Research, who expects the yield to fall further to 1.35%.
“Until we see a meaningful step-up in fiscal stimulus to stabilize consumption and the property market, the downward trend in China rates is unlikely to reverse,” she said.
On Wednesday, the People’s Bank of China cut the interest rate charged on its one-year policy loans, following a broad stimulus package unveiled a day prior to revive confidence in the world’s second-largest economy. Analysts see the cut to the MLF rate as a prelude to more significant steps, including a likely reduction in the rate on seven-day reverse repurchase notes.
“The belly of the curve now looks attractive” as the markets expect a cut in deposit rates, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. He foresees continued momentum in the notes. “We see bull steepening in the next few weeks.”
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