China's Bond Yields Spike to 3-Year High as Debt Selloff Spreads

Updated on
  • Notes track slump in Treasuries, U.K. gilts on growth outlook
  • Chinese sentiment already negative amid deleveraging campaign

China’s sovereign bonds tumbled, pushing 10-year yields to a three-year high, as a debt slump that started in the U.S. and the U.K. spread to the world’s second-largest economy.

Yields on notes due in a decade climbed five basis points to 3.98 percent in Shanghai, the highest since October 2014. The gain follows a 32 basis-point surge over the past seven weeks. Five-year Chinese bond yields also jumped, crossing 4 percent for the first time in more than three years.

Friday’s offshore bond moves are “weighing on the local market amid already very negative sentiment,” said Li Liuyang, an analyst in Shanghai at China Merchants Bank Co. “If global economic growth continues to be solid -- as is indicated by Treasuries and gilts -- then that in turn will be good news for the Chinese economy, and help boost inflation.”

The selloff in Treasuries and U.K. gilts is boosting pressure on China’s bond market, which is already reeling from investor anxiety over Beijing’s campaign to reduce leverage. Signs the global economy is improving are fueling losses that accelerated last month after People’s Bank of China Governor Zhou Xiaochuan voiced concern over high borrowing levels and signaled that economic growth could beat expectations.

Chinese bonds extended their decline even after data released in the afternoon showed credit grew less than economists expected in October. Figures released last week, however, showed consumer-price inflation accelerated 1.9 percent in October, the fastest pace since January.

Read more here about the October loans and credit data.

Liquidity in China’s financial system is also tight.

The PBOC drained a net 340 billion yuan ($51 billion) in its open-market operations over the past two weeks, pushing the overnight repurchase rate up eight basis points to 2.82 percent on Monday. The liquidity squeeze showed up in the swaps market, with the cost of one-year interest-rate swaps rising for a fifth day, the longest run since May.

Four Percent

Ten-year yields in China are set to break above 4 percent, economists Li Huiyong and Qiu Difan at Shanghai-based brokerage Shenwan Hongyuan Group Co. wrote in a report. Changjiang Securities Co. in Wuhan, central China also predicts further yield increases amid quickening domestic inflation and the slump in bond markets elsewhere.

Yields on 10-year gilts eased back on Monday, dropping three basis points after surging seven basis points on Friday, the most since Sept. 15. Societe Generale SA put the retreat down to stronger-than-forecast U.K. factory output data. In the U.S., benchmark Treasury yields also fell after ending last week with a six basis-point climb.

— With assistance by Helen Sun

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