Subdued Yield Level Makes No Harm to the CGBs Outlook

Bonds

Greater China Sales Traders

Summary:  Bond yields in China tested key level in August as global yields were under pressure from worldwide central banks were getting dovish. The new LPR facility rolled out by PBOC added funding strength to both equity and fixed income markets alike. Meanwhile, Bond Connect volume reached another record high in the month.


China bond markets

Government bonds: short term yield recovery

As expected, China sovereign yield tested 3% level and even broke that level briefly at mid Aug, as yield hunting globally has driven demand on China bonds. It can be seen that foreign bond buying activities picked up significantly through CIBM and bond connect. However, FED managed to maintain its independency, even just for now, has managed to keep market’s expectation on yields to hold for now. China has carried out multiple actions to marketize funding rates, such as Loan Prime Rate, to drive up bank’s willingness to lend to SMEs. The act itself was supposed to drive the rates down, however speculation of Chinese government will continue to implement fundamental support to its economy has brought some confidence to its stock market. Demand for safety assets is lower so yields recovered moderately.

However, China-US trade woe is not going away, with both sides not backing up much. Tariffs were increased on 1st of Sep and another batch is planned in Dec, for both sides. Global yields are taking a breather in reaction to Fed’s trying to talk down the possibility of major rate cuts. However economic situation is not improving much. Geopolitical uncertainties loom, with middle east is at the verge of breaking out military action, new British government is looking to have a hard Brexit, ect. Safety assets are not given up, just that markets were seeking better returns, temporally. As market now is quite fragile, any break out is possible to lure capital into safety asset again. Chinese government bonds seem to be a good choice, after all, the yields are still not bad.

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