China's 10-year yield dropped below 2% to hit its lowest point on record on Monday, breaking a psychological barrier as a sputtering economy and bets on further rate cuts drive investors into the safety of bonds.
Prices in China's bond market have been on a decade-long rally - one that kicked into a higher gear roughly two years ago as the country's property sector woes and weakness in the stock market combined to prompt a flood of funds flowing into bank deposits and the debt market.
A ban on offering preferential deposit rates on Friday was the latest signal that rates are staying low.
Benchmark 10-year yields dropped 5 basis points (bps) to 1.9750% in Monday afternoon trade. That's the lowest point in data from China Central Depository & Clearing that stretches to 2002 and marks only a handful of times that the yield has been below 2%.
Despite efforts from authorities to restrain the bond rally, including episodes of central bank selling and an increase in issuance, investor appetite seems insatiable and analysts expect the rally to continue into next year.
"Fundamentals are still very weak. Policies are merely support to prevent the economy from a hard landing, not a strong stimulus," said Ke Zong, a former portfolio manager at hedge fund Mingshi.
He added that previously hesitant funds and institutions were still under-allocated, and insurance companies often allocate in advance before the new year starts, driving down yields.
In addition to a cautious outlook for China's economic growth, the likelihood of U.S. tariffs on China imports mean China rates should rally next year, Morgan Stanley strategists said in a note, adding that the bank's economists expect China's central bank to cut the policy rate by 40 bps by the end of the first quarter.
China's 10-year treasury futures, which move inversely to yields, jumped 0.4% on Monday to finish at a record closing high. The 30-year treasury yield fell 4 bps to 2.16%.
After spending much of the past ten years more than a hundred basis points higher than U.S. rates as China's economy hummed along, 10-year Chinese yields speared below U.S. rates in 2022 when China's economy fared much worse than the U.S. economy in the wake of the pandemic.
Chinese 10-year bonds now yield 222 bps less than their U.S. counterparts. The last time the gap was so large was in the early 2000s when global markets were recovering from the bursting of the internet stocks bubble.
Deposit rates drop
The People's Bank of China (PBOC) has sought to bring deposit rates offered by banks to non-bank financial institutions such as brokerages and fund companies in line with the 7-day reverse repo rate, a policy rate, which is currently at 1.5%.
The policy pushes down short-term rates, and could "become a new driver for the downward trend in long-term bond yields," Yang Yewei, an analyst at Guoshen Securities, said in a note.
Indeed, the interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs) dropped roughly 10 basis points on Monday to below 1.7%. NCDs are a popular short-term debt instrument issued between banks for their financing needs.
Funding conditions remain supportive for the bond bulls, even though more than 1 trillion yuan of refinancing bonds have been issued in November.
The PBOC said last Friday it injected 800 billion yuan via 3-month outright reverse repos and bought a net 200 billion yuan of government bonds in November.
Chen Jianheng, an analyst at China International Capital Corp, said in a recent webinar that loose monetary policy would reduce interbank deposit rates and help push down 10-year yields to around 1.7-1.9% next year.
(Reporting by Shanghai Newsroom; Editing by Tom Westbrook and Edwina Gibbs)
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