Bond yields in China remain attractive as central bank lends support

Bonds

Greater China Sales Traders

Monetary Policy Update

50bp reserve requirement ratio (RRR) cut effective 16 September. PBOC also announced an extra 100bps RRR cut for city commercial banks operating solely within their respective provinces, of which 50bps will take effect on 15 October and 50bps on 15 November. These measures could release CNY 900bn of long-term funding.

The one-year official LPR(Loan Prime Rate) was lowered to 4.20% from 4.25%. The five-year LPR remained at 4.85%. The 5 bps decline in China’s official one-year Loan Prime Rate reflects the authorities’ intent to reduce funding costs at a measured pace. The small cut, following a similar reduction last month, suggests the People’s Bank of China going forward may make more incremental, but higher frequency, adjustments to interest rates.

Source: Saxo Bank, Bloomberg

Reasons behind Higher 10-Year China Government Bond Yield

The China 10-year government bond yield near 15bps higher from intra-month low near big figure level at 3%. This move is largely isolated to yields in developed markets, for example the US 10-year government bond yield went through a massive swing due to initially a position squeeze higher from 1.43% low to once 1.9% high based on positive risk sentiment surrounding US-China trade front. Then it resumed downtrend due to renewed risk-off. Thus, the yield spread between China-US widened in the second half of September.

Despite the clear signals of slowing economy growth, current move higher of China government bond yield was due to two main factors: 1) Market is bit worried about potential inflation pressure due to rising pork price and its high correlation with overall inflation rate; 2) PBOC Governor Yi Gang said at a press briefing that China must avoid massive stimulus, keep debt levels sustainable and maintain a prudent monetary policy stance. This reduced market expectation of large scale of monetary easing.

Source: Saxo Bank, Bloomberg

Inflation pressure from rising pork price can explain why PBOC would not rush to follow the US Fed and ECB in cutting rates and that China’s monetary policy will maintain its prudent orientation.

Source: Bloomberg

Bond connect flash report

Content from BOND CONNECT: http://www.chinabondconnect.com/documents/FlashReportforBondConnect-2019-09.pdf

By the end of September, a total of 1311 institutional investors have enrolled in the Bond Connect scheme. Italy has been added this month as the 31st jurisdiction that Bond Connect has covered globally. The scheme has onboarded 62 out of the top 100 global asset managers, with more in the pipeline.

Scheme Enhancements

Launched on September 25th, global investors can now access real-time indicative prices from all Bond Connect dealers via the Bloomberg terminal, increasing market transparency and improving price discovery.

Source: https://www.chinabondconnect.com/en/market-data.htm

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