(Bloomberg) — China’s short-term bond yields slumped further to reach the psychological milestone of 1% for the first time since the global financial crisis, as traders ramped up bets on monetary easing.
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Yields on one-year Chinese sovereign bonds fell for a ninth straight session to 1%. The move comes after 10-year yields dropped past 2% for the first time on record earlier this month.
The declines reflect growing bets that China will undertake deep interest-rate cuts next year, after top leaders switched to a “moderately loose” monetary policy stance to support the struggling economy. Demand for short-dated debt is also rising as the central bank’s pushback against the bond-buying frenzy prompts traders to shift away from longer-dated notes which are more exposed to intervention risks.
Short-dated securities may be benefiting from several factors, including ample liquidity and the central bank’s operation of “buying short-term government bonds and selling some longer-dated notes,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group Ltd.
The pricing “looks quite extreme though,” Xing said, noting that yields have fallen below the roughly 1.1% paid by banks for deposits that are often used to buy bonds.
In August, the People’s Bank of China sold long-dated bonds and bought short-maturity notes to cool the rally, after it began a bond-trading operation to adjust liquidity and influence the direction of yields. Since then, the PBOC’s monthly operation has led to purchases totaling 700 billion yuan ($95.9 billion) of government bonds on a net basis in the four months through November.
The rapid drop in yields is spurring debate about whether China is heading toward a recession, with interest rates possibly hitting zero if government efforts to bolster consumption and property demand continue to fall short. China’s longer-maturity yields recently fell past their Japanese counterparts, a sign that fixed-income investors were positioning for Japanification.
The zero-rate scenario in China can’t be ruled out if deflationary pressure persists, Johanna Chua, head of emerging market economics at Citigroup Global Markets, told Bloomberg TV earlier this week.
Still, a growth pickup, along with a shift in consumers’ savings behavior and a more cautious PBOC policy than expected, could turn the bond bull run into a rout next year, said Adam Wolfe, an emerging markets economist at Absolute Strategy Research. “China’s bond market likely overstates the easing that’s expected,” he said.