(Bloomberg) — China’s government bonds declined as trading resumed after a one-week holiday, as demand for haven assets dropped amid bets a historic stock rally may extend thanks to Beijing’s stimulus blitz.
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The yield on China’s most actively traded 10-year bond rose seven basis points to 2.22% on Tuesday. That’s after the rate climbed in the days leading to the Golden Week break, as traders flooded into the stock market after officials unleashed stimulus measures including interest-rate cuts and initiatives to support the ailing property sector.
The stocks frenzy continued on Tuesday as the benchmark CSI 300 Index climbed almost 11% in early trading before paring its advance, while the onshore yuan declined as much as 0.6%, the most in almost two months. Speculation that the nation’s top economic planner will unveil more stimulus measures on Tuesday was also adding to the bearishness in the bond market.
The selloff in bonds underscores growing optimism in the Chinese economy as investors plough money into riskier assets. It also marks a swift turnaround in sentiment from last month when yields touched record lows amid doubts over China meeting its growth target of around 5% this year.
The sudden downturn in bonds may raise the risk of redemptions from wealth management products that powered the record rally in sovereign debt for most of this year. That could trigger a negative loop where retail investors rushing to sell their debt products worsens the rout.
“It is most likely mainly reflecting a portfolio rebalancing from bonds to equities as many investors are chasing the equity rally,” said Lynn Song, greater China chief economist at ING Bank NV. He doesn’t expect a vicious cycle of downturns in the bond market and sees focus returning to China’s challenging growth outlook.
(Updates with stock market moves in paragraph three and analyst comment in last paragraph.)
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