Extra yield over similar U.S. debt hits highest level since 2011.
Chinese bond yields have risen to multi-month highs, as investors have dialed back hopes for more aggressive easing from the country’s central bank.
Yields on the country’s 10-year sovereign bonds, denominated in yuan, this week hit their highest levels since late February, according to Wind. They stood at about 2.83% by Thursday afternoon in Shanghai. Yields on shorter-dated bonds have also jumped. Bond yields rise as prices fall.
The selloff, while painful for existing holders, could have a silver lining for Chinese authorities. Beijing has been eager to attract more international money into its bond and stock markets, opening new investment channels in recent years and securing inclusion in various influential indexes. The drawdown, combined with this year’s huge rally in U.S. debt, means that the extra yield Chinese 10-year bonds offer compared with equivalent U.S. Treasury notes has hit its highest in years.m Comparing bond yields across currencies isn’t straightforward because factors such as inflation, credit risk, currency volatility and hedging costs come into play, but an eye-catching yield premium could bolster the case for buying more Chinese debt.
Chinese bond yields tumbled earlier this year, as the coronavirus pandemic erupted and investors flocked to the safety of sovereign debt. Ten-year yields hit a low of around 2.5% in early May. However, while the People’s Bank of China has eased monetary policy in recent months, which tends to boost bond prices, it has been less forceful than the Federal Reserve.
Until recently, investors thought China’s central bank might cut interest rates further, start buying assets or again reduce reserve-requirement ratios, which means lowering the amount of cash banks are required to set aside as reserves.
This week, the Chinese central bank dashed hopes for further broad easing, with a narrowly targeted $56 billion plan to support small businesses, which officials stressed didn’t amount to “quantitative easing,” or large-scale buying of bonds or other securities. “Traders interpreted the move as a signal that general monetary easing was not coming. Their expectation was not met, and many had to unwind positions, particularly those built with borrowed money,” said Khiem Do, head of Greater China investments at Barings in Hong Kong.
Senior officials, including China’s premier and a deputy governor of the central bank, have stressed recently that they want to keep monetary measures targeted, in a bid to support small businesses while avoiding fueling speculative bubbles. Mr. Do said a yield gap, or spread, of more than 2 percentage points over U.S. debt was rare and made Chinese sovereign bonds attractive to foreign investors, absent a further significant worsening in trade or geopolitical tensions between the U.S. and China. However, he said that technical factors could have exacerbated the selloff. Mr. Do. said a jump in a short-term rate, the overnight repurchase rate, from 0.7% to 1.8% might have prompted some forced selling of bonds. “It is not unreasonable to suggest that we are close to the peak of the Chinese-U.S. government bond spread,” Mr. Do said. The overnight repo rate remained elevated on Thursday, at about 1.69%, according to Wind.
China’s currency and bond yield has always in the past been causes of friction between the United States and China, leading to widespread condemnation and calls to political leaders across the spectrum in America to legislate bans on Chinese output.