China’s Sovereign Bonds Rally as Stocks Slump Deters Risk-Taking

China’s sovereign bonds rallied, pushing the 10-year yield to a six-week low, as a collapse in the stock market spurred demand for the safest assets.

The yield on government notes due April 2025 declined for a third day, falling eight basis points to 3.43 percent as of 4:37 p.m. in Shanghai, National Interbank Funding Center Prices show. It tumbled nine basis points on Monday, the most since April 20. The Shanghai Composite Index of equities declined, extending its loss for the past month to 27 percent.

“The stocks rout will probably change investors’ risk preference,” said Xu Hanfei, a Shanghai-based analyst at Guotai Junan Securities Co. “Market participants are having to rethink their expectations for returns and hence are increasing bond holdings in their portfolios.”

China is seeking to bring borrowing costs down to revive an economy expanding at the slowest pace in more than two decades and help towns and cities refinance their debt more cheaply. While short-term yields responded to the central bank’s four interest-rate cuts since November, those on long-term debt held up as municipal bond issuance surged and investors pumped funds into stocks, which rallied in all but one of the 13 months through May.

The People’s Bank of China said it conducted 50 billion yuan ($8.1 billion) of seven-day reverse-repurchase agreements on Tuesday, keeping funds in the financial system as a similar amount of the contracts matured.

The seven-day repurchase rate, a gauge of interbank funding availability, fell three basis points to 2.55 percent, according to a weighted average from the National Interbank Funding Center. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, declined one basis point to 2.4 percent, data compiled by Bloomberg show.

Vice Finance Minister Zhu Guangyao said the government is confident of achieving its full-year economic growth target of about 7 percent, the China Economic Weekly reported. Gross domestic product increased 7.4 percent in 2014, the slowest pace since 1990.

— With assistance by Helen Sun

Before it's here, it's on the Bloomberg Terminal.