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Don’t look to US Treasuries’ rally to understand the ‘sticky’ yields in Chinese government bond market
- Rather than US Fed moves, it’s the uncertainties on China’s economic, policy and inflation fronts that explain the lack of direction in the Chinese government bond market
- Amid slowing growth momentum, there is room for Chinese bond yields to trend lower
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Different from the “fast and furious” US Treasury market, China’s onshore bond yields have been stagnating since the fourth quarter of 2020, which has puzzled many investors.
For instance, the benchmark 10-year Chinese government bond (CGB) yields have been hovering around 3.2 per cent over the past few months, with little sign of changing dynamics or direction. Naturally, investors are curious about the reasons behind the “sticky” yields in China’s “boring” bond market.
First, although the consensus view sees China extending its economic recovery, the overall outlook remains uncertain. China’s gross domestic product growth is likely to have peaked in the first quarter of 2021, implying a slowdown in momentum.
However, there is still hope that improving global demand will provide additional impetus to the Chinese economy, and domestic consumption could see further recovery as more people are vaccinated.
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Nonetheless, risks still loom, including worsening US-China tensions as the Biden administration ramps up pressure over climate change, democracy and human rights. In addition, concerns about a retreat from accommodative monetary policy and a property bubble still cloud the economic outlook.
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