(Bloomberg) -- China’s benchmark government bond yield fell to a record low, testing policymakers’ resolve to stem the move.
The yield on the 10-year sovereign note fell to 2.17% on Friday, below the 2.18% hit on July 1, according to data compiled by Bloomberg going back to 2002. Recent interest rate cuts by the People’s Bank of China to boost a flailing economy have undermined its efforts to guide longer-dated bond yields higher.
Pessimism is growing toward the world’s second-largest economy, putting pressure on yields as traders seek havens and expectations grow of further rate cuts to come. That’s even as the PBOC prepares to borrow and sell government bonds to cool the rally, warning investors of the potential for losses should the market reverse.
“The cut to MLF rate and deposit rate led to the door for a flattening curve,” said Zhaopeng Xing, a senior China strategist at ANZ Bank China Co Ltd., referring to the moves in the bond market. “We expect the growth performance remains subdued in Q3. Property data will not see a rebound in the next few weeks.”
Red Line
The central bank sees excessively low yields as endangering financial stability and weighing on the yuan. A Bloomberg survey had suggested 2.25% was a red line for the PBOC for the benchmark 10-year note.
“The PBOC would want to warn market again, but not necessary start selling bonds right away,” said Becky Liu, head of China macro strategy at Standard Chartered Bank. “PBOC is not targeting a hard line, it is targeting the shape of the curve.”
For Liu, the recent cut to the seven-day repurchase rate, which is being set up as the new policy benchmark, suggests the PBOC’s comfort level for 10-year yields has shifted lower.
Goldman Sachs Group Inc. economists led by Xinquan Chen forecast the 10-year yield to be 2.1% by the end of the year, writing in a note. They suggested the PBOC’s goal is ultimately an upward sloping yield curve rather than fixing yields at a particular level.
China’s central bank has said it has hundreds of billions of yuan worth of medium- and long-term bonds at its disposal to borrow, after signing agreements with several major financial institutions. It said it would borrow the bonds on an open-ended unsecured basis and sell them depending on market conditions.
“The chance has increased,” said Albert Leung, a rates strategist at Nomura Holdings Inc. “But it’s hard to call the timing as this week’s rate cut probably shows lower overall social financing cost is a higher priority than drawing a line in the sand in how long CGB yields can go.”
--With assistance from Shulun Huang and Tania Chen.
(Updates with additional comment.)
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