Chinese Bonds Headed for Longest Run of Losses in Three Years

  • Yield curve widest in two months amid inflation, global rout
  • Yuan drops past 6.83 level it was pegged at after 2008 crisis

What's Driving the Selloff in Bond Markets?

Chinese sovereign bonds headed for the longest losing streak in three years, driving the yield curve to the widest in two months, as accelerating inflation and signs of an improving economy damped demand for the safety of government debt.

The difference between the yields on one- and 10-year government notes, a measure known as the yield curve, rose to 67 basis points on Monday. The gap has been forced apart by a surge in the longer-term yield, with a central bank effort to reduce leverage in the financial market and a global selloff adding to the pressure.

China’s economy held ground last month following new measures to cool property markets in almost two dozen big cities, with industrial production matching September’s pace of 6.1 percent. This follows data last week that showed factory-gate inflation exceeded estimates and the consumer-price index rose the most since April, reducing the odds of an interest-rate reduction. China’s debt selloff comes amid a $1.2 trillion global bond rout on speculation Donald Trump will increase spending to boost the U.S. economy, stoking inflation and leading the Federal Reserve to raise interest rates.

“There’s no positive news for bonds in the short-term to support the market,” said Chen Peng, an analyst at Fortune Securities Co. “We have accelerating inflation, stabilizing economy, an external market selloff -- all these are affecting the long-end of the curve more than the short-end, leading to a steepening.”

The 10-year yield on government debt rose four basis points to a four-month high of 2.88 percent as of 4:23 p.m. in Shanghai, taking a seven-day advance to 15 basis points, according to National Interbank Funding Center prices. The overnight repurchase rate in Shanghai climbed seven basis points to 2.29 percent, while one-year interest-rate swaps rose six basis points to a 19-month high of 2.91 percent.

The yield gap between Chinese and U.S. 10-year government debt narrowed to the least since January last week after a plunge in Treasuries. A global bond rout is intensifying on speculation Trump’s spending plans, with investors rotating into stocks. Pacific Investment Management Co. said the Fed may raise borrowing costs three times by the end of 2017.

The People’s Bank of China injected funds into the financial system for a second day, adding a net 90 billion yuan ($13.2 billion) on Monday, data compiled by Bloomberg show. The monetary authority drained cash for seven days in a row previously, pulling a net 659.1 billion yuan.

The central bank has raised the cost of funding by offering longer term reverse-repurchase agreements from August, and replacing three-month Medium-term Lending Facility with one-year contracts. The measures helped to reduce the transactions of overnight repos in the interbank market to the least since February.

Yuan Weakens

In the currency market, the yuan fell as the PBOC set its daily reference rate at the weakest level in more than seven years. The Chinese currency fell as much as 0.38 percent in Shanghai to cross the 6.83-per-dollar level that it was pegged at after the 2008 global financial crisis. It fell to 6.8412, the weakest since March 2009. The exchange rate in Hong Kong’s overseas market dropped to a record-low 6.8499.

A measure of expected volatility in the Chinese currency jumped to the highest in three months, while forwards weakened to a seven-year low, after Trump’s win stoked speculation a more protectionist U.S. will prompt China to allow steeper declines to support growth. The Republican victor has threatened to call China a currency manipulator on his first day in office and impose 45 percent tariffs on the nation’s imports.

— With assistance by Helen Sun

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