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China Bond Traders Cut Leverage as Covid Shift Dampens Haven Bid

  • Funding costs, yields diverge in a sign of reduced leverage
  • Bond selloff may worsen amid panic sales by retail investors

China’s bond investors are pulling back from a popular carry-trade strategy as the rapid easing of strict Covid measures boosts the country’s growth prospects.

The one-year China government bond yield rose to the highest since January this week while the overnight repo rate retreated toward 1%, close to its lowest since 2021. The divergence points to a likely unwind of leveraged bets, where traders profit from borrowing in the interbank market and purchasing government bonds.