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(Bloomberg) -- China’s effort to keep liquidity conditions ample in the onshore market is pushing down short-end yields while offering some relief from a flattening curve loathed by authorities.
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The nation’s one-year yield slipped nearly 10 basis points this week, the most since December and outpacing declines in rates on bonds due in a decade. That means the sovereign yield curve has steepened moderately, after becoming the flattest since late 2023 before the Chinese New Year holiday.
Short-end bonds are now being anchored by the People’s Bank of China’s record liquidity injection with a new policy tool in January and bets Beijing will have to ease monetary policy amid still sluggish economic data. Earlier last month, one-year yields surged because of an onshore cash squeeze.
Investors have been closely watching China’s yield curve to see if authorities will step in to steepen it as it signals bearish growth prospects in the long term. PBOC Governor Pan Gongsheng and his predecessor Yi Gang have both spoken about their desire to maintain a “normal, upward sloping” curve in recent years. This incentivizes the market to invest, Pan said in June.
A flattening yield curve is an unfavorable situation for the PBOC, as it usually “sends a signal of lack of confidence in the economy, and is often seen as a recessionary indicator,” said Lynn Song, chief economist for greater China at ING Bank. “Given the market’s sensitivity to this, the PBOC will likely hope to manage the curve to have a healthy slope.”
In early January, short-end yields jumped after the PBOC suspended sovereign bond purchases to cool off a debt rally and defend a slumping yuan. A delay in interest-rate cuts due to depreciation pressure on the currency also added to the upward pressure on rates.
Yield on China’s one-year sovereign note fell about nine basis points during a holiday-shortened week to 1.21%, according to official data. The 10-year bond yield declined around three basis points during the same period.
“The flattening of Chinese government bond yield curve has taken a pause” and won’t likely flatten even more in the near term, said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. “The PBOC likely wants to maintain ample liquidity stance amid a step-up in measures to support economic growth.”