China Bond Rout Deepens as Rally in Local Stocks Gathers Steam
Futures on 30-year sovereign notes fell as much as 0.7% Thursday, extending this week's drop to 1.5% at the low as a gauge of onshore equities reached its highest point since October. The moves are less dramatic in the cash bond market, with yields on the same maturity government paper up one basis point.
The world's second-largest bond market has come under increased pressure in the past month, thanks to easing US-China trade tensions and optimism that efforts to curb overcapacity and excessive price wars will pull the economy out of deflation. Dwindling expectations for further monetary easing in the short term, as well as the imposition of a tax on certain bond investments have also soured investor sentiment.
Weighing on bonds is 'asset allocation rotation as equities have fared well lately and there may be a gradual recovery of some investor risk appetite,' said Lynn Song, Greater China chief economist at ING Bank. 'To support the bond market, we would need to see measures such as cuts to the benchmark rate.'
While the traditional see-saw effect between stocks and bonds appears to be the driving force behind investors' decisions at the moment, how far the debt market selloff can go may ultimately hinge on China's growth momentum.
Official data released Wednesday showed a key measure of lending at Chinese banks contracted for the first time in two decades in July, with broad credit growth also slowing.
That said, the amount of cash already sloshing around the system will likely continue to drive flows to stocks. The overnight funding benchmark in China's money market dropped to a two-year low earlier this month.
'The loose liquidity is driving risk-on sentiment,' said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group. Panic redemptions by bond funds 'has already started.'
With assistance from Iris Ouyang.
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