(Bloomberg) -- Chinese bond investors are pushing yields to new lows as they price in a gloomy outlook for economic growth and brush aside the central bank’s efforts to cool a rally in longer term debt.
The yield on China’s benchmark 10-year government bond is set to close at a record low level on Thursday, while the 30-year yield extended declines to the lowest in almost two decades. The moves follow a wave of growth forecast downgrades for China by global banks, and come as authorities mull mortgage rate cuts to ease a real estate crisis extending into its fourth year.
The People’s Bank of China sold long-dated bonds and bought short-term debt last month in an attempt to curb a rally in the long-end of the yield curve. However, heavy demand for Chinese bonds from local investors and rising expectations of rate cuts have partly undermined the PBOC action.
“We see increasing chances of a interest rate cut in China following the Federal Reserve in September,” said Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group. The central bank is likely to put its yield curve control measures on the back-burner due to the urgent need to support the economy, he said.
Growing bets on PBOC rate cuts have pushed five-year onshore interest-rate swaps, a gauge of banks’ expectations of borrowing costs, to their lowest level since 2009.
Some analysts have called the PBOC’s twin objectives of boosting the economy while curbing a bond market rally contradictory, arguing that such measures cancel each other out. Still, the PBOC stepping into the market had some effect. Shorter-dated bonds led the rally this week, widening the yield gap between three- and ten-year notes to the most since 2020 on Wednesday.
Goldman Sachs Group Inc. called the PBOC’s move “Chinese style yield curve control.”
“The efforts to set a floor for long-term Chinese government bond yields appear to be effective for now, but weak domestic demand and poor sentiment may drive yields lower in the medium term,” strategists including Xinquan Chen wrote in a note.
China’s 10-year yield slipped to 2.1160% on Thursday and a close below the August 2 low of 2.1277% would be the lowest on record, as per ChinaBond data.
“Whilst, as widely anticipated, the central bank has been intervening to sell long-dated bonds, it is the economic forces and direction of the policy rate that matter most to bond yields,” Steven Major, global head of fixed income research at HSBC Holdings Plc wrote in a note.
He sees China’s 10-year yield falling to 2% by year-end and to 1.8% by the end of 2025.
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