SHANGHAI: Yields on China's ten-year government bonds fell below US Treasury yields for the first time in 12 years on Monday on expectations of more Chinese monetary easing, which would further sharpen the divergence in policy from the United States.
As US Treasury prices fell, 10-year yields hit a fresh 3-year peak of 2.784%. That compares with a 2.75% yield for the most-traded Chinese 10-year government bond on Monday, not much changed from Friday's levels but down 7 basis points over the past two weeks.
Market participants are anticipating cash injections or rate cuts as prolonged COVID-19 lockdowns in Shanghai hit economic activity. Monday's inversion in the 10-year spread between Chinese and benchmark US yields follows similar moves in shorter maturities last week and was spurred by a jump in US yields , driven by prospects of aggressive Fed policy tightening.
"Apart from the risk of Federal Reserve getting more and more hawkish to arrest inflation, growing fears of global growth slowdown, led by China, amid extended lockdown in Shanghai could continue to weigh on sentiments", analysts at Maybank said in a note.
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Shanghai has extended its city-wide lockdown and doubled down on a quarantine policy, converting schools, recently finished apartment blocks and vast exhibition halls into centres. The drastic steps have raised market hopes for more stimulus to support the Chinese economy.
"Foreign investors might have found Chinese government bonds (CGBs) less appealing given the compression in nominal yield spreads," said France Cheung, rates strategist at OCBC Bank.
"Although there is likely to be less mark-to-market loss in CGBs than most major bonds given the easing policy stance in China, this benefit might not be enough to compensate for the narrowed yield spreads."
Foreign investors' holdings of Chinese sovereign debt had the steepest monthly percentage drop since August 2015 in March, as the worsening conflict in Ukraine prompted a global flight to safety, and as yield premiums for Chinese debt narrowed. Bond traders and economists expect the People's Bank of China could cut interest rates as early as this Friday, when 150 billion yuan ($23.5 billion) worth of medium-term policy loans is due to mature.
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