China’s 10-year bond yield falls to 13-month low

Weak economic growth pushes investors into sovereign debt

China’s 10-year bond yield has fallen to its lowest level in more than a year as weak economic growth pushes investors into the country’s sovereign debt.

Yields on China’s 10-year government bonds slipped 0.01 percentage point on [Aug. 18] to 1.67 per cent, their lowest level since July last year. Bond yields move inversely to prices.

The drop came after China’s statistics bureau released figures on Monday showing growth in industrial output and consumer spending slowed last month.

“I think it’s a reflection of the softer data we’ve gotten over the past couple of days,” said Leonard Kwan, portfolio manager of dynamic emerging markets bond strategy at T Rowe Price.

Strategists see the core issue as a lack of demand for credit in China. Data showed new bank loans fell in July.

“Private-sector companies are not borrowing because they’re not investing, they’re not hiring,” said Eric Robertsen, head of global research and chief strategist at Standard Chartered. “Consumers are not borrowing because they’re not spending at all.”

Wei Li, head of China multi-asset investments at BNP Paribas, said deceleration in the world’s second-largest economy supported higher bond prices.

Weak take-up of loans, low deposit rates and a “shortage of bonds in the market” were driving demand for China’s sovereign debt, he added.

China’s falling bond yields stand in stark contrast to those of G7 countries, which are under growing pressure from a combination of expansionary fiscal policy and strong private-sector demand for credit.

Yields on 10-year US Treasuries and 10-year Japanese government bonds both rose 0.02 percentage point to 4.74 per cent and 2.93 per cent respectively.

“Chinese bond yields are going down when globally yields are going up, which is quite striking,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore. It gives a “very clear signal that domestic concerns are dominating the market rather than what’s going on globally”.

Robertsen said the primary driver of the divergence between Chinese and US government bond yields was the different demand for credit in the two economies.

Silicon Valley’s so-called hyperscalers, including Amazon and Google parent Alphabet, have expanded borrowing so much that they are pushing up borrowing costs globally.

“The composition of growth with demand for credit is so different in the two places,” said Robertsen. “I think it explains a lot of why you’ve got this massive divergence in bond yields.”

Beijing is counting on a greater share of future growth coming from innovative industries and technology, including AI and humanoid robots, but it is likely that the country’s interest rates and bond yields are trending lower.

“The broader picture is that China should see pretty low interest rates,” said Hui Shan, chief China economist at Goldman Sachs.

“China has more savings than investment demand going forward [and] that would put downward pressure on interest rates in general,” she said, adding that the move downward “will be a grind” because of concerns over state banks’ net interest margins.

Further reading:

‘Not worth the squeeze’: global private equity makes zero deals in China

China investment slump deepens as economy shows signs of weakness