China’s 30-year yield hits lowest since 2005 on deposit rate cuts
A FRESH round of large banks’ deposit rate cuts turbocharged Chinese government bonds, driving some ultra-long yields to the lowest in nearly two decades, as the move may steer investment towards the debt market.
In Friday (Dec 22) morning trading, 30-year sovereign notes yields dropped to 2.8 per cent, set for a fresh low since 2005, while 10-year yields continue to edge down to the lowest since September. Bonds gained steam after media reports that big state-owned banks are planning to lower the yield offered to clients on some deposit products by as much as 25 basis points. The lenders later confirmed the report.
A cut to deposit rates means the cost of funding for banks is lower and they will be more motivated to buy bonds. Also, individual investors and corporates may consider redirecting their term deposits into financial products that typically invest in fixed-income assets.
China bond yields have already been declining since earlier this month amid the economic gloom and the central bank’s liquidity support to smooth year-end funding. Bond bulls are also optimistic about the prospect of the People’s Bank of China (PBOC) easing monetary policy when the US Federal Reserve is seen likely reversing to cut interest rates next year.
“Bonds will be a clear beneficiary of this move, and we think the probability of a policy rate cut by the PBOC is also rising,” said Yewei Yang, an analyst at Guosheng Securities. He expects the 10-year yield to drop to 2.4 per cent in 2024, versus the current level at 2.6 per cent.
The five biggest banks in China launched a third round of deposit rate cuts in a year, as they work to maintain profitability amid shrinking margins and the government tries to boost households’ consumption and investment.
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Latest economic data pointed to a dire growth picture in China last month, as home prices extended declines and credit growth remained slow. A gauge of foreign direct investment slumped to a four-year low.
“Intention to force out savings for more productive use is clear,” but China bond yields still have more downsides than upsides, said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence, citing the lasting drags to growth ranging from property woes to weak confidence among consumers and foreign investors
The large deposit rate cuts are also adding to chances for China’s central bank to lower policy rates, which have stayed unchanged since August, according to economists at Nomura.
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The central bank has already geared up support for the economy via massive liquidity infusions, offering lenders a net 800 billion yuan (S$148.4 billion) of one-year policy loans in an operation in mid-December, the largest amount on record.
“We now expect the PBOC to deliver two 15 basis points of cuts to both the open market operation and medium-term lending facility’s rates in the first half of 2024, likely in January and April, respectively,” Nomura economists and analysts, including Jing Wang, Harrington Zhang, wrote in a note. BLOOMBERG
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