China Bond Traders Still on Edge After Rate Cuts Spur Mini Rallies

(Bloomberg) -- While China’s central bank is helping stem the panic that in October drove its sovereign bond yield to five-month highs, the buoyant mood in the market is unlikely to last.

A series of unexpected policy-rate cuts and liquidity injections keep triggering mini rallies in China’s sovereign-debt market this month. China’s 10-year benchmark yield fell 1 basis point on Tuesday to 3.18%, the lowest in a month, after the People’s Bank of China injected 120 billion yuan ($17 billion) to the banking system in open market operations.

The yield slid 5 basis points on Monday when the central bank lowered borrowing costs on short-term loans for the first time since 2015 and injected 180 billion yuan. It’s deja vu for bond investors who saw yields drop twice before in November following similar supportive actions from the central bank. But any bond rally will be limited as Beijing’s prudent approach to stimulus hasn’t changed, while a trade agreement may boost risk sentiment, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp. “The rate cuts are helpful in turning around the negative sentiment but they’re not a game changer,” Xie said.

The small adjustment to the rates -- Monday’s cut was just 5 basis points -- signal a continuation of the PBOC’s restrained stimulus policy that prevented Chinese bonds from joining in a global rally this year. That’s even as data continues to show weaker economic growth across the board.

The central bank will release November’s loan prime rate -- the base rate for new corporate loans -- on Wednesday. It’s linked to the rate at which the central bank will lend financial institutions cash for a year and is made up of submissions from a panel of 18 banks, though Beijing has a role in setting the level. Citigroup Inc. expects the one-year rate to decline by at least 5 basis points.

Inflation remains a top concern for investors, said Zhou Hao, a senior emerging markets economist at Commerzbank AG. Accelerating inflation due to soaring pork prices in China have depressed real yields, taking them negative for the first time in seven years. Beijing will want to avoid adding too much liquidity, which risks stoking prices even more. “It’s difficult to be very bullish on the outlook for bonds because the issue of rising inflation can’t be ignored,” he said. “I don’t think this is a turning point for bonds.”

Livia Yap

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