China Bond Bulls Seek Central Bank Support After Worst Week Since 2013

(Bloomberg) -- Bond investors burned by the worst week for Chinese government debt in more than five years should look to the central bank for comfort, according to analysts.

Despite data showing a surprise jump in a manufacturing gauge, the People's Bank of China is likely to keep monetary policy loose, thereby supporting bonds -- goes the argument. One brokerage said a reduction in banks' required reserve ratio is possible this month, while a bank pointed to inflows from foreign investors as shoring up sovereign debt.

The yield on 10-year bonds rose 19 basis points last week, the biggest increase since November 2013, in a shock to investors. Buying government debt has been a surefire way to make money in the past 14 months, with the yield falling from around 4 percent to 3.07 percent at the end of March -- the lowest since December 2016.

The yield on the most actively traded 10-year bonds was little changed at 3.25 percent as of 4:34 p.m. in Shanghai. Futures on notes of the same tenure rose 0.14 percent, the first advance in six sessions.

Here's what analysts said:

• Citic Securities Co., in a note: The debt may be supported by a possible cut in the reserve-requirement ratio, which may happen this month as 367 billion yuan ($54.6 billion) of medium-term loans offered by the central bank are set to mature
• Haitong Securities Co. analysts led by Jiang Chao, in a note: Bonds will fluctuate; they will be pressured by a better economic outlook, but also supported by a loose monetary policy
• Guotai Junan Securities Co. analysts led by Qin Han, in a note: The room for yields to move higher will be limited. If liquidity remains loose, there is an opportunity to add long-dated bonds
• Westpac Banking Corp.'s head of Asia macro strategy Frances Cheung said by phone: The prospect of foreign inflows following the inclusion of onshore bonds into a key index will provide support, while the absence of a trade deal and concrete signs of economic stabilization will continue to curb risk-on sentiment

To contact the reporters on this story: Livia Yap in Singapore at lyap14@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann, David Watkins

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