China's Bond Rout Deepens as Policy Bank Yield Tops 5 Percent

  • Yield on China Development Bank bonds rises 16 basis points
  • “Funds will probably continue to flow out,” Shen Bifan says

The selloff in China’s bond market worsened Wednesday, with the yield on a quasi-sovereign issuer exceeding 5 percent for the first time since 2014.

The 10-year yield on China Development Bank notes was 16 basis points higher at 5.04 percent as of 4:50 p.m. in Shanghai, resulting in the biggest spread in three years against similar maturity government notes -- whose yield rose four basis points to 4.03 percent.

“There’s no positive news now, and funds will probably continue to flow out, bringing further pressure to the market,” said Shen Bifan, head of research at First Capital Securities Co.’s fixed-income department in Shenzhen. 

Rising inflation, a government deleveraging campaign, and expectations for tighter liquidity toward the year-end have prompted asset managers to shift funds out of the bond market. China Development Bank, a so-called policy bank, downsized its debt auctions at least twice over the past month as the slump deepened.

“The slump today is triggered by stop-loss orders, and given the negative factors weighing on the bond market remain unchanged, it’ll probably spill over to the broader market, including sovereign and corporate debt,” Shen said.

The 14-day repurchase rate climbed the most this month on Wednesday as the People’s Bank of China refrained from injecting cash into the financial system.

— With assistance by Helen Sun

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