China Bond Yield Jumps by Most in Three Months as Rout Deepens

  • Government sells 5-year debt at highest cost since 2014
  • Investors grow more bearish as PBOC keeps liquidity tight: ANZ

China’s government bonds slumped across tenors, pushing the 10-year yield up by the most since February, on bets regulators’ deleveraging campaign still has a long way to go.

The yield on 10-year government bonds spiked 7 basis points to 3.7 percent as of 5:17 p.m. in Shanghai, while the cost on the five-year note jumped to the highest in more than two years. The selloff accelerated after the Ministry of Finance sold five-year debt at the highest cost since 2014. This suggests financial institutions are betting the yields will climb even further, according to Guotai Junan Securities Co.

"Bonds are plunging at a pace that’s faster than we expected," said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd., who sees the 10-year yield ending 2017 at 3.8 percent. "Investors have expected the central bank to ease liquidity when strain appears, but they’ve been repeatedly disappointed. So some are being forced to sell their holdings, leading to a sharper slump in the security."

Chinese regulators have issued a raft of directives since April aiming at curbing financial leverage and damping speculative trading of stocks, triggering a slump in bonds and equities. The insurance watchdog said Tuesday it would focus on insurers’ major stock purchases and investments in real estate, as well as overseas and alternative assets, to prevent risk.

There are signs the pessimism is spreading to the currency market, with the yuan’s 12-month non-deliverable forwards touching the weakest level since March 21. The People’s Bank of China on Wednesday cut its fixing -- which limits the currency’s moves to 2 percent in either direction from a set level -- for a third day to 6.9066, the lowest since March 21.

"We are probably starting to see the deleveraging campaign’s effects spill over to the currency market," said Banny Lam, head of research at CEB International Investment Corp. in Hong Kong. "But I don’t expect depreciation to get out of control, as China has capital controls in place to keep the exchange rate stable."

— With assistance by Tian Chen

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