China Bond Yield Falls to Six-Month Low as Inflows Predicted

  • Proposed wealth product rules seen benefiting bond market
  • Money-market rate falls most in three weeks after injection

China’s government bonds rose, pushing the 10-year yield to a six-month low, on speculation a plan to tighten regulation of wealth products will drive funds into debt.

The nation’s banking regulator is proposing new rules that would require wealth-management products issued by smaller banks to invest in less risky assets such as government bonds, people familiar with the matter said. Money-market rates fell on Thursday as the People’s Bank of China injected a net 50 billion yuan ($7.5 billion) through open-market operations, helping to ease liquidity that had tightened due to tax payments and amid speculation that intervention to support the yuan was causing a shortage of the currency.

"Liquidity has improved from yesterday, plus there was the news about WMPs," said David Qu, a strategist at Australia & New Zealand Banking Group Ltd. in Shanghai. Under the proposed rules, less risky and more transparent assets such as bonds will benefit, whereas riskier investments will suffer, he added.

The yield on sovereign notes due 2026 fell three basis points to 2.78 percent, the lowest for benchmark 10-year bonds since Jan. 22. The benchmark seven-day repurchase rate fell four basis points, the most since July 1, to 2.36 percent, according to a weighted average from the National Interbank Funding Center.

China’s WMP market has swelled to more than $3 trillion in size as individuals sought returns trumping deposit rates. Meanwhile, banks used the products to lure funds and circumvent restrictions on lending and investments. Assuming 8 percent of WMPs are reallocated to bonds, there will be 1.9 trillion yuan of additional demand in the next two or three quarters, ANZ’s Qu wrote in a note.

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