(Bloomberg) — China’s benchmark bond yield rebounded from a historic low after the central bank’s widespread stimulus package pushed bullish investors away from the bond market and toward stocks.
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The yield on China’s 10-year government bonds declined to a record low of 2% after the People’s Bank of China unveiled measures including a policy rate cut and lower reserve requirement for banks. But the potential economic implications of these moves and plans to support the stock market fueled risk appetite and sent bond yields higher once again.
While analysts were divided on the long-term effectiveness of the wide-ranging package, the short-term impact was clear: a shift toward risk and away from safe haven assets such as government bonds. This may relieve pressure on the People’s Bank of China, which has been trying to slow a debt market rally that indicates investors are betting on a prolonged economic slowdown.
“This move is noteworthy because if these tools succeed in rebooting investor sentiment and reviving animal spirits, that could have a positive medium-term impact on the economy,” said Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp. “An increase in equity market activity and confidence could stimulate growth, eventually leading to higher bond yields and a stronger yuan as the economy strengthens.”
The yield on the ten-year government bond was up 2 basis points at 2.06%. Yields on the 30-year government note jumped 4 basis points, the most in six weeks, to 2.18%.
The Hang Seng China Enterprises Index, a gauge of Chinese stocks listed in Hong Kong, jumped as much as 5%.
China’s rates market will reprice in the wake of the stimulus announcement, with 10-year government bond yields moving 10 to 15 basis points higher, said Yongbin Xu, co-chief investment officer of U-Shine Private Equity FD Mgt Co.
But despite Tuesday’s moves, some analysts and traders still think there is scope for the 10-year yield to fall below 2% in the longer term. PBOC officials hinted at more easing measures to come, which will ultimately put pressure on bond yields.
“It will be interesting to see if the PBOC steps in again to try and protect the 2% level, but I am personally expecting it to move below 2% at some point,” said Lynn Song, chief economist for greater China at ING Bank NV. “If we see more easing later in the year, it would not surprise me to see it move down to 1.8% or so.”
China Unleashes Stimulus Blitz in Push to Hit Annual Growth Goal
The People’s Bank of China has tussled with bond market investors this year, worried that banks will take a balance sheet hit should policy rates suddenly rise. Traders had also interpreted its moves as an attempt to stop a deflation mentality from becoming entrenched among traders.
It has also launched probes of the trading activity of small rural lenders, and bought short-term bonds and sold longer maturity bonds in an apparent attempt to steepen the yield curve.
The decline in Chinese government bond prices on Tuesday may also have been fueled by investors taking profits after a prolonged rally this year.
–With assistance from April Ma and Qizi Sun.
(Adds chart, reflects latest stock moves and updates background on PBOC pushback to bond rally.)
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