China Bonds Decline as 10-Year Yield Rises Most Since February

(Bloomberg) -- China's sovereign bonds declined, pushing the 10-year yield up by the most since February, as some investors judged a four-week run of gains to be excessive.

The yield on notes due May 2026 climbed four basis points to 2.85 percent as of 4:41 p.m. in Shanghai, according to National Interbank Funding Center prices. The yield on the similar-maturity benchmark fell 14 basis points in June, the most this year, and reached a five-month low last week, ChinaBond data show.

China's official factory gauge retreated to the dividing line between expansion and contraction last month, while a measure of services edged higher, signaling the nation's two-speed pace of growth. Data to be released this weekend are likely to show that declines in producer prices narrowed further in June, and credit expansion continued. A lack of monetary easing could limit any further downside in yields, after Chinese government debt rallied along with peers around the world following the U.K.'s vote to leave the European Union.

“Economic fundamentals are pointing to range-bound trade in sovereign bonds,” said Wei Taiyuan, an investment manager at China Merchants Bank Co. in Shanghai. “With so much data coming up, some people may be trying to lock in profits following the decent rally last month.”

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, climbed three basis points to 2.44 percent, data compiled by Bloomberg show. That's the biggest gain since May 18.

The People's Bank of China auctioned 90 billion yuan ($13.5 billion) of seven-day reverse-repurchase agreements on Monday, draining a net 180 billion yuan as maturing contracts exceeded issuance.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Robin Ganguly at rganguly1@bloomberg.net, Philip Glamann

With assistance from Helen Sun