The downward trend in China rates may not reverse unless there is a meaningful step-up in fiscal stimulus to stabilise consumption and the property market, a strategist says
TRADERS are snapping up China’s five-year government bonds, attracted by the lower risk of central bank intervention for this maturity.
Yields declined nearly five basis points to 1.68 per cent on Wednesday (Sep 25) – set for a record low – indicated Bloomberg data going back to 2002. The five-year bonds have seen net inflows every month this year, except in August, the data shows.
The trend highlights persistent demand, particularly in the middle of the yield curve, and coincides with this week’s stimulus measures, which have pushed up the Chinese yuan and stocks, said Janice Xue, Asia FX strategist at Bank of America global research.
The five-year bonds are in “the sweet spot” with lower intervention risk compared to longer-tenor debt, she noted.
“Until we see a meaningful step-up in fiscal stimulus to stabilise consumption and the property market, the downward trend in China rates is unlikely to reverse,” the strategist added.
The People’s Bank of China on Wednesday cut the interest rate charged on its one-year policy loans, following a broad stimulus package unveiled a day prior to revive confidence in the world’s second-largest economy.
Analysts see the cut to the medium-term lending facility rate as a prelude to more significant steps, including a likely reduction in the rate on seven-day reverse repurchase notes.
“The belly of the curve now looks attractive” as the markets expect a cut in deposit rates, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. He foresees continued momentum in the notes.
“We see bull steepening in the next few weeks.” BLOOMBERG
