(Bloomberg) — China’s bond frenzy may be close to fizzling out as yields on long-term sovereign notes trade at the deepest discount in more than a decade to the cost of investors’ favorite financing tool.
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The yield on 30-year bonds slumped 10 basis points below the overnight interbank rate this week, the biggest discount since December 2013. Volumes in the repurchase market have also eased, signaling that borrowing money to buy sovereign bonds may no longer be attractive for investors seeking yield-based returns.
China’s government bonds handed investors the highest return in a decade in 2024 as concern over the economy and a dearth of local lucrative assets fanned the demand for debt. Yields have fallen further this year on worries that a global trade war will add to growth headwinds. However, delays in interest-rate cuts and other moves by authorities to cap the yuan’s losses are putting a floor under borrowing costs and bond yields.
“The negative carry might be a headwind for further bond purchase,” said Stephen Chiu, chief Asian foreign-exchange and rates strategist at Bloomberg Intelligence. “There could be risks of yields rebounding as current levels might be too low relative to policy rates and fundamentals.”
China’s 30-year yields are close to their lowest levels since 2004 while the benchmark 10-year yield lingers near a record low.
The demand for haven assets has also spilled over to policy bank notes. The yield on 10-year China Development Bank bonds slid to 1.6% this week, a level unseen since 2003. The move wiped out its yield gap with government bonds of a similar tenor for the first time in 19 years.
“The rally in CGBs may be losing some steam given yields are already at low levels,” said Frances Cheung, head of FX & rates strategy at Oversea-Chinese Banking Corp.
China’s efforts to keep the yuan stable by keeping liquidity conditions tight may also be cooling the demand for debt. The overnight repo rate rose to a one-month high this week before easing from those levels. Moreover, the People’s Bank of China said last month it will halt bond purchases in an attempt to thwart bearish bets on the economy.
However, analysts still expect bond demand to pick up down the line when expectations start growing for the PBOC to cut rates.
