China’s bond market experienced a significant rally on Tuesday, with yields dropping to record lows following the People’s Bank of China’s (PBOC) announcement of measures aimed at boosting economic growth. The central bank revealed it would cut the reserve requirement ratio for banks by 50 basis points and reduce the reverse repo rate, which has sparked renewed investor interest in government bonds.
Data from LSEG indicated that the yield on China’s 10-year government bonds fell by 3.2 basis points, reaching a historic low of 2.041%. Similarly, the yield on 30-year bonds decreased by 0.4 basis points, hitting another record low at 2.168%. According to Winson Phoon, head of fixed income research at Maybank, “Yields declined due to larger-than-expected PBOC easing. The 20 basis points cut to the 7-day reverse repo rate is the largest since the Covid crisis. While commendable, it is no big bang rate cut.” Phoon further noted that while the move is expected to improve sentiment in the short term, a sustainable recovery in the medium term remains uncertain.
At a press conference, PBOC Governor Pan Gongsheng highlighted the central bank’s strategy to stimulate growth in light of ongoing deflationary pressures. Following last week’s interest rate cut by the U.S. Federal Reserve, which initiated a broader easing cycle, Pan indicated that the PBOC could also lower rates further to support economic activity. The onshore yuan weakened to 7.06 against the dollar in response to these developments.
In recent months, there has been a notable influx of institutional investors and insurance companies into China’s bond market, largely due to limited investment opportunities in other sectors. The declining real estate market and the underperforming stock market have further driven this trend. However, the PBOC has issued warnings regarding the risks of destabilizing bubbles as investors flock to government bonds. In July, the PBOC-affiliated “Financial News” criticized the rush to purchase bonds, calling it a form of “shorting” the economy.
Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, emphasized that government bonds are currently seen as the only safe asset in China, stating, “This is the only asset in China that is safe. The rest — credit, equity, are not safe.” The PBOC’s Pan hinted at a potential reduction of 0.2-0.25% in the loan prime rate, although no specific timeline was provided. With the current environment favoring lower yields, many investors are turning to sovereign bonds as a stable investment amid economic uncertainties.
