Macroscope | As US interest rates rise, Chinese bonds might emerge as a winner

Earlier this week, the US Federal Reserve held interest rates steady and acknowledged rising inflation, but gave investors little indication that officials are worried about a rapid spike in prices or an abrupt slowdown in economic growth. This reiterated to the markets that the Fed will continue its measured path of rate increases. US government bond prices have inched higher as a result, with the yield on the benchmark 10-year Treasury note hovering around 3 per cent.  

The debate in the US – over how quickly and to what extent the Fed can successfully normalise monetary policy – will continue, but an interesting observation for Asia is that US and Chinese bond yields are starting to converge.  

Whereas US Treasuries are on the cusp of breaking through the top end of their range, potentially signalling the end of the 35- year bond bull market, Chinese government bonds have been pushed downwards by signs that China’s central bank is easing monetary policy as the economy slows. Following the People’s Bank of China cutting the required reserve ratio, the gap between Treasury and Chinese bond yields dropped to a multiyear low, which showcases the policy divergence across the two markets.