June 27 2024: China’s treasury futures soared to new highs on Thursday, while long-term yields hovered near record lows as investors continued pouring money into bonds, disregarding repeated risk warnings from the central bank.
Chinese bond mutual funds’ assets surged to a record 6.5 trillion yuan ($894.3 billion) in May, marking a 40% increase from a year earlier, according to official data. This rise reflects how lower deposit rates are channeling savings into fixed income products amid stock market volatility.
This bond bull run in China mirrors investor pessimism towards an economy grappling with a real estate crisis, local government debt troubles, and heightened geopolitical risks.
Markets largely agree that China’s interest rates will trend lower, Su Gang, Chief Investment Officer at China Pacific Insurance Group, stated at a conference this week. “We’re in the midst of a long cycle that we’ve never experienced before… and the market lacks confidence.”
The continuous decline in yields, which move inversely to bond prices, is testing the People’s Bank of China’s (PBOC) resolve to cool feverish bond buying that it deems could endanger financial stability. Despite these warnings, investors have continued to drive up bond prices this week.
China’s 30-year treasury futures for September delivery rose roughly 0.3% on Thursday morning to a record high, while 10-year bond futures also reached new heights. Meanwhile, China’s 10-year treasury yield dropped below the sensitive 2.3% level, approaching the April low of 2.205%. The 30-year yield has slid below 2.5%, a level many feared could invite central bank action.
Latest data suggests that depositors are moving money into bond funds as banks continue lowering savings rates to reduce costs. Chinese corporate demand deposits in May fell to a two-year low of 52.98 trillion yuan, representing a 7.1% decline from a year earlier, the biggest on record, according to central bank data.
Meanwhile, bond mutual fund assets in May grew to a record 6.5 trillion yuan, up 40% from 4.6 trillion yuan a year earlier.
Banks, hesitant to lend in an unstable economy, are also investing heavily in Chinese government bonds, seen as safe haven assets. Smaller banks, which have fewer quality clients to lend to, are more active in bond buying than major banks. Commercial banks own about 20.3 trillion yuan worth of Chinese government bonds in the interbank market, accounting for 71% of the total. Banks also purchase other types of yuan-denominated bonds, such as those issued by state policy banks.
($1 = 7.2685 Chinese yuan)