China’s benchmark bond yields have rebounded from historic lows following the central bank’s expansive stimulus package, which prompted investors to pivot from the bond market to stocks. The yield on 10-year government bonds fell to a record low of 2% after the People’s Bank of China (PBOC) introduced measures including a policy rate cut and a reduction in banks’ reserve requirements. However, these moves, coupled with plans to support the stock market through a stabilization fund, sparked a greater risk appetite, driving bond yields higher.
While analysts remain divided on the long-term efficacy of these measures, the immediate effect has been a notable shift away from safe-haven assets like government bonds. This dynamic may relieve pressure on the PBOC, which has been striving to temper a bond market rally indicative of investor concerns over a prolonged economic slowdown.
“The market has long awaited a signal to become bullish on stocks, and while most announcements matched expectations, the mention of the stabilization fund was an unexpected bonus,” said Liu Xiaodong, fund manager at Shanghai Power Asset Management Co.
The yield on 10-year government bonds rose by 2 basis points to 2.06%, while yields on 30-year government notes increased by 4 basis points—the largest jump in six weeks—reaching 2.18%. Meanwhile, the Hang Seng China Enterprises Index, which tracks Chinese stocks listed in Hong Kong, surged by up to 4%.
Traders anticipate further declines in the 10-year yield, with expectations of more easing measures from officials, including additional cuts to reserve and policy rates in the coming months. “It will be interesting to see if the PBOC intervenes to protect the 2% level, but I expect it to fall below that threshold at some point,” noted Lynn Song, chief economist for greater China at ING Bank NV. “If more easing occurs later this year, a drop to around 1.8% wouldn’t surprise me.”
The PBOC has been navigating tensions with bond market investors, concerned about potential balance sheet impacts on banks if policy rates rise abruptly. The central bank has also been taking steps to counter a deflationary mindset among traders, including probing the trading activities of small rural lenders and adjusting its bond purchases to influence the yield curve.
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