(Bloomberg) –Yields on China’s benchmark government bonds fell to a record low as investors continued to buy government bonds on pessimism about the domestic economy.
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The yield on the 10-year U.S. Treasury note fell 2 basis points to 2.18%, closing at the lowest level since Bloomberg began tracking the data in 2002. Yields on 20-year and 50-year notes have been trading at record lows in recent months.
Bond prices surged on the back of ample liquidity in the financial system due to China’s slowing growth, expectations of interest rate cuts and weak demand for loans. Increased government borrowing to bolster fiscal stimulus could not keep bond buyers away.
The People’s Bank of China has resisted the rise in stock prices and has suggested it may sell some of its shares to curb the rise.
The latest economic data highlights continuing challenges to China’s growth: Factory activity contracted for a second straight month in June, while new home sales continued to fall last month, though the pace of decline slowed, official data showed.
“The reason for the decline in yields is mainly the pessimistic mood about the economy,” said Steven Qiu, chief Asia FX and rates strategist at Bloomberg Intelligence. “It’s not at all clear how far yields will fall before the PBOC starts raising rates, but the next level to watch is probably 2% to 2.1%.”
The move comes as China watchers prepare for one of the country’s biggest annual policy gatherings, the so-called Third Plenum, to be held later this month. At an economic conference in December, Chinese leaders said they were considering “new fiscal and tax reforms,” raising hopes that details might be revealed there.
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Chaopeng Xin, senior strategist at Australia & New Zealand Banking Group, said the decline in yields suggests traders are dialing back expectations for big fiscal stimulus. He sees the benchmark yield falling to around 2.15%.
“The rise in bond prices reflects persistent concerns about weak domestic demand and expectations that the People’s Bank of China may need to cut policy rates in the third quarter to spur growth,” he said. “Demand for bonds will be primarily supported by banks’ asset management products, which continue to see inflows due to deposit outflows.”
–With assistance from Jing Zhao.
(Updates with economic data and additional comment.)
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