From Bloomberg, December 19:
China One-Year Bond Yield Sinks to 1% for First Time Since 2009
- Yield drop reflects bets on PBOC easing next year, Mizuho says
- Market is likely overstating rate-cut bets: Absolute Strategy
China’s one-year bond yields slid to 1% for the first time since the global financial crisis as traders increased bets on additional monetary easing and investors sought haven assets.
Yields on one-year sovereign debt dropped for a ninth straight day Friday to reach 1%, a level last seen in 2009. The decline came after benchmark 10-year yields slipped below 2% this month for the first time.
The slump in bond yields in recent months reflects growing speculation that China will enact deep interest-rate cuts next year to bolster its flagging economy. Demand for shorter-maturity debt is also rising after the central bank pushed back against the bond-buying frenzy, prompting traders to shift away from longer-dated securities that are more exposed to the risk of intervention.
The drop in one-year yields reflects “prevailing expectations for PBOC’s strong easing next year amid the moderately loose policy and the shortage of high quality fixed-income assets,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank in Hong Kong. “Such developments could intensify concerns over US-China monetary policy divergence, and reinforce yuan depreciation pressure.”
The onshore yuan weakened 0.1% to 7.2986 per dollar Friday, after sliding to a more than one-year low the day before. Ten-year bond yields dropped two basis points to 1.73%. China saw a record capital outflow last month under the category of securities investment, according to official data released this week.
Shorter-dated securities may be benefiting from several factors, including ample liquidity and the central bank’s operation of “buying short-term government bonds and selling some longer-dated notes,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group Ltd. in Shanghai.
Still, the latest yield move “looks quite extreme” as they have fallen below the level of about 1.1% paid by banks for deposits that are often used to buy bonds, Xing said.
The People’s Bank of China sold longer-maturity bonds in August and bought short-maturity ones in an effort to cool the debt-market rally. The central bank has purchased a net 700 billion yuan ($95.9 billion) of government bonds in the four months through November, according to official data.
The slide in Chinese bond yields is spurring debate about whether the nation is heading toward a recession. There is some speculation interest rates may potentially fall to zero if government efforts to bolster consumption and property demand continue to fall short. China’s longer-maturity yields dropped below their Japanese counterparts last month in a sign investors are positioning for so-called Japanification of the world’s second-biggest economy....
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Also at Bloomberg, December 16:
China Capital Exodus Reaches Record Speed on Tariff Threat
