In a significant development, China’s 30-year government bond yields have hit their lowest point since 2005, spurred by a recent round of substantial deposit rate cuts by major banks. The move is anticipated to channel investments into the debt market, with some ultra-long yields reaching levels not seen in nearly two decades.
During Friday morning trading, yields on 30-year sovereign notes plunged to 2.84%, marking a fresh low since 2005. Concurrently, 10-year yields continued their descent to the lowest point since September. This downward trend gained momentum following reports that prominent state-owned banks are planning to reduce yields on certain deposit products by up to 25 basis points—an update later confirmed by the lenders.
The reduction in deposit rates translates to lower funding costs for banks, potentially motivating increased bond purchases. Moreover, individual investors and corporations may redirect their term deposits toward financial products that typically invest in fixed-income assets.
China’s bond yields have been on a downward trajectory since earlier this month, influenced by economic uncertainties and the central bank’s liquidity support to ease year-end funding concerns. Bond enthusiasts are also buoyed by optimism regarding the People’s Bank of China potentially easing monetary policy, especially as the Federal Reserve is expected to consider interest rate cuts next year.
Yewei Yang, an analyst at Guosheng Securities, commented, “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.” He anticipates the 10-year yield to drop to 2.4% in 2024, compared to the current level at 2.59%.
The five largest banks in China have initiated a third round of deposit rate cuts within a year, aiming to sustain profitability amid shrinking margins. This aligns with the government’s efforts to boost household consumption and investment.
Recent economic indicators point to a challenging growth scenario in China, with home prices continuing to decline and credit growth remaining sluggish. The intention to channel savings into more productive uses is apparent; however, concerns persist about China’s bond yields having more downside potential than upside. Stephen Chiu, Chief Asia FX and Rates Strategist at Bloomberg Intelligence, cites enduring drags on growth, ranging from property issues to weakened consumer and foreign investor confidence.
The substantial deposit rate cuts also increase the likelihood of China’s central bank lowering policy rates, which have remained unchanged since August, according to economists at Nomura. The central bank has already taken steps to support the economy through significant liquidity infusions, including a record-setting 800 billion yuan ($112 billion) of one-year policy loans in mid-December.
Nomura economists and analysts, including Jing Wang and Harrington Zhang, anticipate the PBOC delivering two 15 basis points cuts to both open market operations and medium-term lending facility rates in the first half of 2024, likely in January and April, respectively.
