China Bonds Drop on Stimulus Bets as Deficit Aim Set at Record

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Inside China's Economic Blueprint
  • Sovereign 10-year yield climbs to highest level in a month
  • Supply pressure to increase as nation backs economy: analyst

Chinese sovereign bonds fell, with the 10-year yield rising to a one-month high, on concern that the government will increase borrowings to support the economy.

The nation’s fiscal shortfall is projected to widen to a record 3 percent of gross domestic product this year from 2.3 percent last year, according to a report from the Ministry of Finance. Total issuance of sovereign notes will rise to 3.44 trillion yuan ($529 billion), while that of municipal bonds will grow to 5.18 trillion yuan, according to China Merchants Securities Co. estimates.

“With the increase of the deficit ratio, stronger fiscal stimulus will set a floor for growth, and economic expansion is likely to become faster later this year,” said China Merchants Securities analyst Sun Binbin. “As central and local government bond sales jump, supply pressure will increase.”

The yield on government notes due January 2026 rose three basis points to 2.95 percent, the highest level since Feb. 6, as of 4:30 p.m. in Shanghai, according to National Interbank Funding Center prices.

The most-active June contract of 10-year bond futures on the China Financial Futures Exchange declined 0.36 percent, the most in a month, to 98.695.

The bigger fiscal deficit ratio will ensure some key spending, Finance Minister Lou Jiwei said at a conference in Beijing, adding that the move aims to support the economy. The nation will increase infrastructure spending on big, cross-regional projects, he said.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, climbed one basis point to 2.31 percent, data compiled by Bloomberg show.

— With assistance by Helen Sun

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