(Bloomberg) — China’s historic bond rally is likely prompting traders to take on more leveraged bets, driven by expectations of further policy easing amid concerns over the impact from the potential US tariffs.
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The volume of overnight repurchase contracts jumped to 7.6 trillion yuan (US$ 1.04 trillion) on Tuesday, the highest since August 2023, according to data compiled by Bloomberg. This indicates traders are increasingly using this popular borrowing tool to cash in on the extended rally in local sovereign bonds.
Carry trades have increased as China’s central bank is expected to further ease monetary policy to boost the economy and support the increased issuance of government bonds. The 10-year yield dropped to the lowest level on record on Monday, reflecting worries about President-elect Donald Trump’s trade policies and muted expectations among debt investors from two upcoming key political meetings in China.
“Bond investors are leaning toward the fixed income market,” said Lv Pin, chief fixed income analyst at Topsperity Securities Co. “Expectations on monetary easing and recent moves to lower certain rates have contributed to the rise in financing via repo instruments.”
Sovereign bond yields in China have smashed record lows this year, as the central bank’s easing measures and economic slowdown support the safest bets in the world’s second-largest economy. Despite a brief retreat after Beijing’s stimulus blitz rolled out in late September, bond prices resumed their advances amid ample liquidity and the absence of a large fiscal stimulus.
The central bank has injected billions into the financial system via net purchases of sovereign bonds and outright reverse repurchase agreements to address cash demand and prevent any disruptions from an accelerated pace of bond issuance.
On Wednesday, the 10-year bond yield dropped three basis points to 1.96%. Meanwhile, the overnight repo rate gained five basis points to 1.39%.
(Updates prices in final paragraph. A previous version corrected day of week in second paragraph.)
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