Chinese government bond yields rose sharply on Friday amid talk that economic growth might start recovering in the second quarter of this year. The indicative five-year government bond yield jumped to a one-month high of 2.0360 percent bid from 1.8638 percent on the previous day, its biggest daily rise in at least 30 months, Reuters Reference Rates showed. Yields at the short and long ends of the curve rose much more moderately.
"Yields had gone too low and traders are dumping bonds in the wake of this week's data," said a trader at a securities firm in Shanghai. The five-year bond yield had tumbled more than 170 basis points since mid-September to a multi-year low of 1.7940 percent in late December.
But traders were already speculating late last month that bond yields might have dropped too fast. Stronger-than-expected December money supply and loan data began to push yields back up this week.
The strength of the stock market in the past three days, partly because of the announcement of government aid for key industrial sectors, also hurt bonds. The Shanghai Composite Index rose more than 3 percent at one stage on Friday afternoon in heavy trade.
Traders do not think the easing of monetary policy has completely finished, and a strong market rumour on Friday said December consumer price inflation, to be announced next week, fell to 1.2 percent from November's 2.4 percent. "The market still expects an interest rate cut in February so selling of bonds will calm down," said the securities company trader.
UBS said in a research note on Friday that real yields of longer-term government bonds would become attractive by February because of expectations for deflation in the first quarter. "We recommend investors buy 10-year government bonds when the yield hits 3.0 percent," UBS said. The 10-year government bond yield rose to a one-month high of 2.9770 percent bid on Friday from 2.8577 percent on Thursday.
But many traders said Friday's dramatic back-up in medium-term yields was a warning that a strong bull market in bonds was unlikely to resume this year. A trader at another European bank predicted the 10-year yield would in coming weeks rise to about 3.50 percent.
Even if yields fall back next month after another official rate cut, they are unlikely to hit new multi-year lows, the securities company trader said. Traders do not expect any change in very loose money market liquidity for at least several months, given the risks and uncertainties associated with any economic recovery.
But they sold bills on Friday because yields and repo rates were near the 0.72 percent rate on excess reserves held with the central bank, and since signs of economic recovery could make the central bank less willing to consider cutting that rate.