China's Longest Bond Rout Has Further to Go as Rates Climb

(Bloomberg) -- China's money market rates are set to grind higher and a bear market in bonds will worsen before it gets better, according to a survey of strategists and traders. 

The seven-day repurchase rate will average 2.99 percent in 2018, up from 2.88 percent in the fourth quarter, according to the median estimate in a Bloomberg survey. The yield on 10-year government debt is projected to rise as high as 4.20 percent before ending the year at 3.75 percent. The yield was little changed at 3.93 percent on Wednesday.

China's sovereign bonds have fallen for five quarters, the longest losing streak since Bloomberg started to compile the data in 2005, as the government stepped up a campaign to cut leverage in the financial sector and inflation picked up. The 10-year yield rose last year by the most since 2013.

“Given the deleveraging and risk control efforts, liquidity will tighten further in 2018, though it may not be as harsh as last year,” said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. in Shanghai.

China's central bank will increase money market rates as it seeks to curtail excessive borrowing and avoid too much divergence with U.S. policy, according to a separate survey. The People's Bank of China will raise interest rates on reverse-repurchase agreements by five basis points three times this year, starting in the first quarter.

Below is a summary of other findings in the survey of 15 participants on Dec. 21-27:

• “Short duration” and “high coupon” is the most popular investment strategy
• The 10-year government yield will end the first quarter at 3.9%, while all but one participant predicted bonds will stabilize by the third quarter
• The yield on 10-year China Development Bank debt is forecast to end the first quarter at 4.8% and the year at 4.7%
• Negotiable certificates of deposit and convertible, exchangeable bonds are the most favored types

The participants in the Bloomberg survey included China Minsheng Banking Corp., U-Shine Fund Management Co., Hengfeng Bank Co., China Merchants Bank Co., Guotai Junan Securities Co., Lianxun Securities Co., SDIC Essence Futures Co. and Nanhua Futures Co. Seven traders and analysts asked not to be identified as they are not allowed to comment publicly on the matter.

--With assistance from Mengchen Lu and Shuqin Ding

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net, Xize Kang in Beijing at xkang7@bloomberg.net, Ling Zeng in Shanghai at lzeng30@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies

©2018 Bloomberg L.P.

With assistance from Helen Sun, Xize Kang, Ling Zeng