(Bloomberg) -- China’s surging longer-maturity bonds are still a buy due to entrenched deflationary pressures and the prospect of further monetary easing, according to Abrdn Plc.
The money manager is holding long positions on 10-year debt with a yield target of 1% in about three years, and also favors 30-year bonds, said Edmund Goh, an investment director at Abrdn in Singapore. Persistent deflation means that real interest rates are still relatively high, providing room for further easing, he said.
In the long run, the People’s Bank of China “has more room to cut because real rates are still positive,” said Goh, whose firm oversees the equivalent of $644 billion. “But I don’t think the market needs PBOC to cut rates to rally. If the fiscal policy next March disappoints, I think long-end rates will continue to decline,” he said, referring to policy announcements due in the first quarter of 2025.
China’s 10-year yield dropped to an all-time low of 1.72% this week, down from 2.56% at the end of 2023, as the economy has struggled amid weak consumption and a property crisis. The authorities have vowed to take further measures to spur growth, with a top leaders who met last week signaling bolder economic support in 2025.
Abrdn considers its 10-year and 30-year bond holdings to be long-term investments, Goh said. “This would be a structural trade, like something you would hold for more than 12 months,” he said.
The 10-year yield may decline to 1.5% by the end of 2025, and fall further in the following years, Goh said.
“In the short term, it’s unlikely we will cut duration,” he said. “Over the long term, if you don’t think inflation will come back, then bond yields should head lower.”
Abrdn is just one of the many financial firms bullish on Chinese bonds. Standard Chartered, Tianfeng Securities and Zheshang Securities all predict 10-year yields will drop to as low as 1.5%-to-1.6% by the end of 2025.
China’s one-year interest-rate swaps, a popular hedging tool sensitive to rate expectations, are close to a four-year low this week. That reflects traders’ bets on additional easing after top officials last week pledged to keep monetary policy “moderately loose” next year.
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