China yields dip, curve steepens after another short-term rate cut

[SHANGHAI] Benchmark Chinese government bond yields on Monday (Jan 24) fell through a key level for the first time in nearly 20 months after the central bank announced its latest rate cut and as expectations grow for further easing to stabilise the slowing economy.

China's 10-year yield slipped below 2.7 per cent for the first time since May 28, 2020, falling 2 basis points (bps) in early trade to 2.685 per cent before retracing. It last stood at 2.720 per cent.

Sharper falls at the short end of the curve drove the spread between Chinese 2-year and 10-year government bond yields to its highest since Jul 14, 2020.

The 30-year yield slipped around 3 bps to 3.2625 per cent, its lowest since April 10, 2020.

"The short-term is brought down by rate cuts, and long-term is not only affected by rate cuts but also by the economic outlook," said Wei He, China economist at Gavekal Research in Beijing.

"The base-line scenario that the market is now believing is that economic growth will recover in the next few months as a result of more policy easing despite the downward pressures for now (being) still big, which prevents long-term yields from falling much."

The fall in bond yields came after China's central bank lowered the funding cost of 14-day reverse repurchase agreements on Monday while injecting 150 billion yuan (S$31.8 billion) into the banking system to "maintain stable liquidity ahead of Chinese New Year".

Last Monday, China surprised markets by cutting the borrowing costs of its medium-term loans for the first time since April 2020, and also lowered a short-term lending rate. On Thursday loan prime rates (LPR) were reduced and on Friday the PBOC trimmed rates on its standing lending facility (SLF) loans.

Analysts expect more easing measures in China in coming months, even as other major global central banks begin tightening policy and withdrawing unprecedented amounts of liquidity pumped into their economies to cushion the impact of the Covid-19 pandemic.

"China has stepped up its policy easing intensity and frequency since late 2021," analysts at Goldman Sachs said in a note. "Policy support is becoming more evident across the fiscal and property cohorts, and policymakers' rhetoric has also turned more pro-growth in recent months."

REUTERS