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The yield on China’s 10-year government bonds has dipped below 1.8% for the first time since November, as investors anticipate further monetary easing in preparation for the upcoming Lunar New Year holiday. Yesterday, the 10-year treasury bond yield dropped to a low of 1.793%. Since bond prices and yields typically move inversely, this decline indicates rising bond prices.
According to Ming Ming, chief economist at Citic Securities, the increase in bond prices is driven by two main factors. First, lucrative opportunities in equities and commodities have diminished. Second, the central bank has signaled a more supportive monetary policy stance, boosting expectations of rate cuts.
Both short and long-term bond traders are increasing their positions around the Chinese New Year, and the ongoing contest between bullish and bearish investors is reaching a critical point, said Lu Pin, chief fixed income analyst at Zhongtai Securities. Long sellers, in particular, are influenced by sustained bond purchases from major banks, which are key in driving up prices for bonds with tenors of ten years or less.
Interest rates on AAA-rated interbank certificates of deposit across various maturities have been steadily declining since the December Central Economic Work Conference, indicating increased efforts toward counter-cyclical easing. Zhang Xu, chief fixed income analyst at Everbright Securities, suggests that rate cuts could happen within the next two to three months.
With the Lunar New Year approaching and the central bank aiming to maintain stable liquidity, many institutions are inclined to hold bonds over the holiday period to secure coupon income. This strong inclination to retain bonds ahead of the holiday is expected to bolster the pre-festival market, according to a recent report by Golden Credit Rating International.
This year’s Spring Festival holiday will last a record nine consecutive days, from February 15 to 23, marking one extra day compared to previous years. Meanwhile, external market volatility and sharp fluctuations in equities and commodities have kept risk appetite subdued, which continues to favor bonds, the report noted.
Some experts believe the bond market may return to focus on economic fundamentals, as key data on consumer and producer prices for January is expected this week. Pre-holiday stock market swings and inflation fears are likely to hinder further declines in bond yields, said Liu Yu, chief fixed income analyst at Huaxi Securities.
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