China’s Sovereign Bond Rally Restored by Brexit as Yields Drop

  • Turmoil spurred by British vote boosts demand for haven assets
  • Concern about China’s economic slowdown also buoying debt

China’s government bonds rallied, with 10-year yields erasing this year’s advance, as Britain’s vote to leave the European Union spurred demand for haven assets and the central bank stepped up injections of funds.

The yield on sovereign debt due in a decade fell as much as eight basis points to 2.82 percent in Shanghai, the level where the benchmark traded at the end of 2015. Before U.K. voters’ decision to leave the European Union added fuel to a rally in bond markets worldwide, Chinese yields had seen the only increase among similar-maturity sovereign debt in the world’s 15 biggest economies. The People’s Bank of China auctioned 270 billion yuan ($41 billion) of seven-day reverse-repurchase agreements on Monday.

“There are too many uncertainties following the referendum, and domestic investors may find it difficult to find value in other assets,” said Guo Wei, a Shanghai-based bond trader at Bank of Nanjing Co. “For bonds, the lack of a mid-year spike in money rates and still weak growth momentum are giving investors additional confidence.”

Chinese industrial companies’ profits rose 3.7 percent in May from a year earlier, slowing from 4.2 percent in the previous month, a report showed Monday. The nation’s economy may face a so-called double-dip recovery, bottoming again at year-end or early 2017, Renmin University researchers wrote in an article published in the China Securities Journal.

Bond Rally

The yield on benchmark U.S. Treasuries approached an almost four-year low of 1.4 percent set on Friday after the odds of tightening by the Federal Reserve this year tumbled to 15 percent, from 76 percent at the start of this month.

The PBOC’s reverse-repo auction was the biggest single-day offering since February. The central bank injected a net 340 billion yuan last week via open-market operations, the most since April.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell one basis point to 2.44 percent, after retreating 14 basis points in the past two weeks, data compiled by Bloomberg show.

— With assistance by Helen Sun

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