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Banking industry

China's Bond Market Faces Uncertainty Amid Economic Slowdown

Strategic Insights

— 2 min read

China's bond market is experiencing excessive optimism after a robust subscription for Agricultural Bank of China's initial public offering, which has led to a rare 2.05 times oversubscription of Treasury notes. Analysts warn that the economy is merely slowing down rather than collapsing, and the current bullish run may not extend beyond two months. The yields for benchmark 10-year fixed-rate T-bonds have fallen significantly since the crisis began, but the People's Bank of China's decision to sustain flat one-year paper's auction yield has alleviated concerns over rate rise risks.

Key Takeaways:

  • The China Ministry of Finance sold a five-year fixed-rate Treasury at a 2.52 percent yield, with a 2.05 times oversubscription rate, indicating excessive optimism in the bond market.
  • The Agricultural Bank of China's initial public offering and Bank of China's huge convertibles sale have sucked an amount of liquidity out of China's money market, driving short-term bond yields up sharply.
  • Chen Liang, fixed-income analyst with Sealand Securities, expects the current bullish run to extend for two months due to ebbing expectations over China's benchmark rate rise and loose liquidity environment.
  • The People's Bank of China's decision to sustain flat one-year paper's auction yield has alleviated concerns over rate rise risks, with the yield remaining at 2.0929 percent.
  • The Government Bond Index on Shanghai Stock Exchange edged down 0.04 percent to 125.75 points on Wednesday, but investors expect it to rally due to fluid market cash flow.
  • Analysts warn that the economy is merely slowing down rather than collapsing, with limited upsides in bonds in the future.

Statistics:

  • The yields for benchmark 10-year fixed-rate T-bonds have fallen from 3.3559 percent in January 2009 to 3.0563 percent in June 2010, a 132.96-basis-point decrease.
  • The Agricultural Bank of China's initial public offering and Bank of China's huge convertibles sale have sucked an amount of liquidity out of China's money market, estimated to be in the hundreds of billions of yuan.
  • The people's Bank of China's one-year paper's auction yield has remained flat at 2.0929 percent since mid-May, indicating no rate rise risks foreseeable in the short term.
  • The China Bond Index has rallied by 10 percent over the past five weeks, with the average monthly return of 2.02 percent.

Sources:

  • XINHUA NEWS AGENCY (2010)
  • By Duan Jing, duanjing@xinhua.org, Copyright 2010 XINHUA NEWS AGENCY

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