China-U.S. Yield Gap at Widest in Seven Months on GDP Momentum

  • Spread between 10-year China, U.S. bonds most since September
  • PBOC skips open-market operations, while offering MLF loans

China's Economy Accelerated for a Second Straight Quarter

As China’s economic expansion accelerates, the local bond market is missing out on a global rally.

The yield on benchmark 10-year government debt rose five basis points to 3.42 percent as of 5 p.m. Monday in Shanghai after a slew of economic reports beat estimates, even as Treasuries rallied. That pushed the spread between the U.S. and Chinese securities to 121 basis points, the most since September.

China’s bond market has been suffering as the world’s second-biggest economy shows signs of gaining momentum and as the central bank boosts short-term borrowing costs to curtail financial risks. While the wider yield advantage should alleviate pressure on the yuan, analysts see little chance of a turnaround for debt investors any time soon.

“With recent economic data exceeding market expectations, there’s no surprise the bond market will continue to be under pressure,” said Zhang Guoyu, a Shanghai-based analyst at Tebon Securities Co. “Given the growth momentum, the PBOC is expected to continue a tightening bias and stay away from any loosening measures. That will in turn have a positive impact on cross-border flows and underpin the currency.”

China’s economic growth quickened last quarter as investment picked up, retail sales rebounded and factory output strengthened, reports showed on Monday. Gross domestic product increased 6.9 percent in the first quarter from a year earlier, posting the first back-to-back acceleration in seven years.

The PBOC skipped open-market operations on Monday, instead offering longer-term funds via the Medium-term Lending Facility, while keeping interest rates unchanged. The monetary authority granted 495.5 billion yuan ($71.9 billion) of MLF loans, compared with combined maturities of 451.5 billion yuan this week and last week.

The benchmark seven-day repo rate, a gauge of interbank funding availability, climbed nine basis points to 2.77 percent, according to weighted average prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, gained four basis points to 3.64 percent.

— With assistance by Helen Sun

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