Key Highlights

  • China's 10-year government Bond Yield slipped to 1.67%, its lowest level since July last year, as weak economic growth data pushed investors into sovereign debt
  • The decline follows figures released by China's statistics bureau showing slower growth in industrial output and consumer spending last month
  • Strategists point to weak Demand for Credit in China as the core issue, with new bank loans falling in July
  • China's falling bond yields stand in sharp contrast to G7 countries, where yields on 10-year US Treasuries and Japanese Government Bonds both rose

Yields Hit Lowest Level Since Last Year Amid Weak Data

China's 10-year bond yield has fallen to its lowest level in more than a year as weak economic growth pushes investors into the country's sovereign debt. Yields on the bonds slipped 0.01 percentage point to 1.67% on Tuesday, their lowest level since July last year. Bond yields move inversely to prices. The drop came after China's statistics bureau released figures showing growth in industrial output and consumer spending slowed last month.

A portfolio manager at a major asset management firm said the move reflects softer data received over the past couple of days. Strategists see the core issue as a lack of demand for credit in China, with data showing new bank loans fell in July. A strategist at a global bank said private-sector companies are not borrowing because they are not investing or hiring, while consumers are pulling back on spending altogether.

Weak Loan Demand and Bond Shortage Driving Prices Higher

A multi-asset Investment head at a major European bank said the deceleration in the world's second-largest economy is supporting higher bond prices, pointing to weak loan take-up, low deposit rates and a shortage of bonds in the market as key drivers of demand for China's sovereign debt. China's falling bond yields stand in stark contrast to G7 countries, which face growing pressure from a combination of expansionary Fiscal Policy and strong private-sector demand for credit.

Yields on 10-year US Treasuries and 10-year Japanese government bonds both rose 0.02 percentage point, to 4.74% and 2.93% respectively. A chief economist at a regional bank said the divergence between falling Chinese yields and rising global yields is striking, signaling that domestic concerns are dominating the market rather than global factors.

Divergence Reflects Differing Credit Demand Across Economies

A strategist said the primary driver of the divergence between Chinese and US government bond yields is the different demand for credit in the two economies. Major US technology companies, including large Cloud Computing and Social Media firms, have expanded borrowing so significantly that they are pushing up borrowing costs globally, a dynamic strategists say partly explains the wide gap now separating Chinese and US bond yields.

Beijing is counting on a greater share of future growth coming from innovative industries and technology, including AI and humanoid robots, though it is likely the country's interest rates and bond yields will continue trending lower. A chief China economist at a major investment bank said China has more savings than investment demand going forward, which would put downward pressure on interest rates generally, though the move downward will likely be gradual given concerns over state banks' net interest margins.