China's 10-Year Bond Yield Declines This Week as Economy Slows

  • 10-year yield could fall as low as 2.7%: Guosen Securities
  • Securities regulator gives go ahead for 10 more IPOs

China’s government bonds rose this week, pushing the 10-year yield to a five-week low, on signs a rally in the debt still has room to run as the economy keeps slowing.

A gauge of China’s factory output fell to the lowest level in more than three years last month, a report showed this week, while imports are forecast to have dropped for the 13th month in a row. Six interest-rate cuts since November 2014 have failed to revive an economy that is projected to grow by the least in more than two decades this year.

The yield on the sovereign notes due October 2025 dropped four basis points this week to 3.05 percent, data from the National Interbank Funding Center show. It fell to 3.04 percent on Thursday, the lowest since Oct. 28. The benchmark 10-year yield has decreased 57 basis points since the end of June, according to ChinaBond data.

"The contraction of domestic demand is the fundamental reason for lower bond yields," Guosen Securities Co. analysts led by Dong Dezhi in Shanghai wrote in a research note Friday. The 10-year yield will fall below 3 percent before the end of year and could reach 2.7 percent to 2.8 percent, they forecast.

China’s securities regulator gave the go ahead on Thursday for a second batch of 10 new share sales. Twenty-eight initial public offerings before the end of the year, including 10 this week, will lock up 3.4 trillion yuan ($531 billion) of funds, according to a Bloomberg survey. The PBOC injected a net 50 billion yuan into the financial system via open market operations this week.

The seven-day repurchase rate, a gauge of interbank funding availability, dropped one basis point this week to 2.31 percent, according to the National Interbank Funding Center. It rose one basis point on Friday. The overnight repo rate on the Shanghai Stock Exchange fell 66 basis points on Friday to 1.84 percent, still four basis points higher than a week ago.

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