China’s 10-Year Yield Sinks To Record Low On Bets PBOC Will Ease

China’s 10-year yield dropped past the key psychological milestone of 2% and was at a record low, as traders ramped up wagers that authorities would ease monetary policy further to bolster the weak economy.

After declining for a fifth straight week, the benchmark yield dropped two basis points to 1.9995%. The 30-year yield also declined four basis points to 2.17%, after falling below its Japanese counterpart for the first time in about two decades last month. 

Investors’ enthusiasm about Chinese bonds comes as the latest slew of data, from improved factory activity to an entrenched housing slump, continues to show an unbalanced recovery in the world’s No. 2 economy. It also reflects concerns about the prospect of escalating trade frictions with the US under Donald Trump’s second presidency.

“The rally in Chinese government bonds was driven by three main factors: expectations of a RRR cut, supportive liquidity condition and still weak economic fundamentals,” Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp., wrote in a note, referring to banks’ reserve-requirement ratio. 

The People’s Bank of China’s increased liquidity support last month and net purchases of sovereign bonds also helped offset a rise in debt supply, he added.

Expectations remain high that an ailing economy will prompt the PBOC to step up monetary easing, including cutting the RRR further and injecting more cash into markets, after it delivered a stimulus blitz in late September.

The 10-year yields “testing 2% to the downside was well expected, but slightly faster than anticipated,” said Kiyong Seong, lead Asia macro strategist at Societe Generale. “Trump tariff related headlines will continue to flow seamlessly but China stimulus headline will take more time.”

The slide in yields may further weigh on the yuan as Chinese bonds now offer lower returns than most of their major global peers, especially the Treasuries. The offshore yuan is hovering near the weakest level against the dollar since July.

Banks will likely increase bond buying in the next two months and push yields lower, according to Zheshang Securities. “We think China may cut interest rates in January, and 10-year yields may fall toward 1.85% around the Spring Festival holiday,” the brokerage’s analysts including Qin Han wrote in a note.

That said, a renewed rally may pose a dilemma for the PBOC and complicate its policy easing effort. The central bank repeatedly warned about and later intervened to arrest a buying frenzy in long bonds earlier this year, out of concerns that excess gains in sovereign debt risk an abrupt reversal that may undermine financial stability.