(Bloomberg) — China’s benchmark government bond yields fell to the lowest in more than two decades as investors continued to flock to government bonds amid lingering concerns about the domestic economy and rising hopes of further stimulus.
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The yield on the 10-year Japanese government bond fell to 2.22%, the lowest since 2002. Yields on 20-year and 50-year bonds have been hovering around record lows for months.
Bonds surged on the back of slowing Chinese economic growth, a more dovish monetary policy and ample liquidity in the banking system at a time when demand for loans is extremely weak. Rising borrowing to bolster fiscal stimulus has not deterred investors.
“With risk sentiment remaining subdued while hopes of some monetary policy support remain, investors are seeing a dearth of better investment options at the moment, leading to safe-haven flows into CGBs,” said Francis Cheung, strategist at Oversea-Chinese Banking Corp in Singapore. “But we would caution against chasing even more yields as long-term rates look too low relative to potential GDP growth at these levels.”
The move came after the People’s Bank of China cut the yuan’s daily reference rate for the sixth consecutive trading day. The yuan is also under pressure from pessimism about the economy as the central bank seeks to counter a gradual depreciation as a persistently stronger U.S. dollar weighs on Asian currencies from the yen to the Indonesian rupiah.
The former officials have called on authorities to ease controls on the yuan to allow more room for monetary stimulus.
China weakens yuan for sixth straight day amid strong dollar
The People’s Bank of China has stepped up verbal opposition to rising bond prices, suggesting it may sell some of its bond holdings to curb the rise.
“We think the PBOC will get concerned at some point and may take some action, such as tightening short-term liquidity or selling Chinese government bonds to slow the decline in interest rates,” said Steven Qiu, chief Asia FX strategist at Bloomberg Intelligence. “But in the longer term, lower rates should become the norm.”
–With assistance from Lv Wenjin.
(Updated based on foreign exchange market conditions)
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