China’s 10-year government bond yield will move slightly higher in the coming months after the central bank’s recent efforts to stem a market rally, analysts predict. That’s despite expectations that the People’s Bank of China will cut rates further if the Federal Reserve eases monetary policy this year, which it’s widely expected to do. The yield fell below 2.1% in early August, a record low. It’s since recovered to around 2.17% after regulators reportedly told local banks not to settle government bond purchases. The bond market had been rallying and yields rapidly declining in the past year. Yields move opposite to prices. Beijing has publicly expressed concerns over the speed of bond buying, which has rapidly lowered yields. Investors of Chinese government bonds include overseas institutional investors, Chinese insurers, and Chinese banks. Chinese government bonds are also in global bond indexes and funds. While exact forecasts vary, several analysts anticipate the medium-term path for the yields is higher, although some say it might not be for long.
Yields Citi analysts expect the 10-year Chinese government bond yield to rise to 2.3% in the next three to 12 months, according to forecasts published Thursday. The 10-year yield is likely to trade somewhere between 2.5% and 3% in 2025 or beyond — depending on how strongly growth and inflation rebound, said Chun-lai Wu, head of Asia asset allocation at UBS Global Wealth Management’s chief investment office. Inflation and bond yields tend to move in the same direction. A near-term rate cut, however, could send the 10-year back down toward the 2.1% level before year-end, he said, although that would be temporary.
Chang Le, fixed-income senior strategist at ChinaAMC, says the 10-year yield could trade in a range as large as 2.1% to 2.5% before narrowing. After the recent drop, long-dated Chinese government bond yields could rise another 10 to 15 basis points, said Zerlina Zeng, head of Asia credit strategy at CreditSights, on Thursday. That would happen if there is additional selling by state-owned banks if China’s central bank continues to intervene or issue guidance, she said. Chinese commercial banks hold roughly 70% of outstanding China CGBs, of which about a quarter are long-dated, according to her. “However, we do not expect a sustained selloff of China CGBs or a materially steeper CGB yield curve given the country’s persistent deflationary pressure, weak credit demand, and fragile economic recovery,” Zeng said. Furthermore, the net supply of central and local government bonds is increasing as the issuance pace picks up to support fixed asset investment, according to her. Central government bonds accounted for just over 10% of the 38 trillion yuan in Chinese domestic bond issuance in the first half of the year, according to a Goldman Sachs report on Aug. 16. Last year, China issued 71 trillion yuan in bonds domestically, a record high going back to 2008. About 14% were central government bonds. Central government bonds account for 19% of China’s domestic bond market, which had 164 trillion yuan in outstanding assets, the report showed. It noted that foreign ownership in China central government bonds fell to 7.1% of outstanding bonds as of June 2024, or about 2.2 trillion yuan. “China rates experienced significant fluctuations amid recent PBOC intervention, while local investors did not view any increase in long-term yields as sustainable, in line with our views,” Goldman said in an Aug. 13 report. The analysts affirmed their view from earlier in the month that they expect the People’s Bank of China will cut the reserve requirement ratio by 25 basis points in the third quarter, and the policy rate by 10 basis points in the fourth quarter. “The potential upside risks to long-term CGB yields in the coming months may come from increased government bond issuance and increased secondary market intervention by the PBOC,” the Aug. 2 report said.
Francis Tan, chief strategist for Asia at Swiss firm Indosuez Wealth Management, which is owned by Credit Agricole, pointed out that higher inflation in China could cause yields to yet hold their ground. He said he believes inflation can trend higher because of improving producer prices, which would translate to stronger consumer inflation and higher freight rates, which can in turn drive up the prices of goods. China’s National Bureau of Statistics spokesperson said on Thursday that producer prices could narrow their losses in the coming months, indicating mild inflationary pressure. Tan predicts the 10-year yields should “start stabilizing” now and will likely stay above 2%. “That said, I do not think we will see any sustained increase in yields because the other asset classes simply do not have any appeal for domestic investors – institutional or retail,” he said, pointing to deposits, gold, stocks, and real estate.
Rong Ren Goh, portfolio manager at Eastspring Investments, predicted such a similar path for yields. “Recent reported measures to discourage China government bond (CGB) purchases could slow the decline of bond yields, but are unlikely to reverse the broader trend driven by a challenging growth outlook and a monetary policy easing bias,” he said. As for other global investors of China bonds, Tan said their interest in buying the asset would depend on the yuan’s performance. “Fortunately, I believe the RMB would strengthen into 2025 also from the weaker USD (upon rate cuts) as well as a stabilizing Chinese domestic consumption story,” he said. Goh, said that however, Chinese investors themselves could be driven to explore alternative investments overseas given the less compelling opportunities in their home market. “As a result, we might see Chinese investors become more active in the region in the same way Japanese investors exerted their influence around global investment markets,” he said.
Foreign investments into onshore bonds Overall, such onshore bonds are also still attractive to foreign investors, both Zeng and Wu said. Zeng said onshore bonds still offer attractive yields to dollar-based institutional investors on a currency-hedged basis. That means investors buy yuan-denominated bonds and hedge the currency risk by using currency forwards to sell the yuan and buy the dollar on a future date. Currency forward is an instrument that locks in the exchange rate on a future date. Because of that higher yield opportunity, there’s been a rise in foreign investments into yuan-denominated bonds this year — to the tune of $88 billion year-to-date, Wu said. “Yuan-denominated bonds can actually [be] pretty attractive if you are a US-dollar based investor, since currency hedging can add another 2.5 to 3% per annum to your returns, which alongside the underlying yield should actually edge out US treasuries,” he said. “The trade has been a good hedge against US Treasuries given the relative low correlation between China CGBs and USTs compared to other Asian local currency govt bonds,” Zeng added. Global investors have preferred to buy U.S. Treasurys over Chinese government bonds since the Federal Reserve’s aggressive rate hikes kept Treasury yields far higher than those of its Chinese counterpart.
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