China’s sovereign bond yields reached their highest levels of the year, as investor optimism about economic growth led to reduced demand for government bonds. The yield on China’s 10-year government bond rose over 10 basis points to 1.865%, marking a 25 basis point increase from January’s lows. This surge followed positive signals from Beijing’s government work report, including an ambitious growth target of 5% for 2025 and a fiscal budget deficit increase to 4% of GDP, suggesting a stronger pro-growth stance.
The jump in bond yields reflected market reactions to growing expectations for fiscal easing and a potential boost in growth. Beijing’s plan to issue 1.3 trillion yuan in long-term special treasury bonds further contributed to the rise in yields, as increased bond supply typically reduces bond prices and drives yields higher. The shift toward higher yields also mirrored a broader shift in investor sentiment, with liquidity moving away from bonds toward riskier assets like equities.
Central to the changes in bond yields is the delayed expectation for interest rate cuts by the People’s Bank of China (PBOC). Despite previous signals that rates might be lowered, PBOC officials have emphasized stabilizing the yuan and managing trade tensions with the U.S. over focusing on immediate monetary easing. As a result, investors have adjusted their expectations, reducing bets on rate cuts in the near future, which has contributed to the increase in yields.
Investor sentiment has turned more positive toward Chinese stocks, with offshore markets rallying, particularly driven by the success of Chinese tech companies like DeepSeek. The MSCI China index surged nearly 20% this year, and the Hang Seng Index outperformed its global counterparts. The bullish outlook on equities led to a shift in liquidity, away from bonds and into stocks, signaling confidence in China’s future growth prospects despite the volatility in the bond market.
SOURCE: CNBC