CNY: A few more thoughts on the falling yields in China – Commerzbank

After the yield on Chinese government bonds fell by around 30 basis points in the first two weeks of December, it stabilised over the course of Monday's and yesterday's trading session and is currently hovering around 1.72%. Among the major bond markets, 10-year government bond yields are lower only in Switzerland and Japan, Commerzbank’s FX analyst Volkmar Baur notes.

PBoC and the banking system buys around 90% of all bonds issued

“The question naturally arises as to where the high demand for government bonds has come from recently. It is unlikely to come from abroad. In the last three months, foreign investors have been steadily selling Chinese bonds on a net basis. This makes sense. If we leave aside capital gains due to falling yields, the yield level in other bond markets is simply more attractive. Moreover, the share of foreign investors in Chinese government bonds is low. At present, around 80 trillion CNY of central and local government bonds are outstanding, of which only around 2 trillion CNY are held by foreign investors.”

“By contrast, around 80% of government bonds are held by the domestic banking sector. And here, things have started to move in recent months. While banks bought only around CNY500bn of bonds per month in net terms in the first six months, this run-rate has almost doubled to CNY835bn in the last five months. In addition, since August there has been a buyer that may be particularly insensitive to price: the central bank.”

“The central bank's purchases have contributed to the decline in the current interest rate. At least the data up to November show that the central bank is not buying government bonds instead of the banking system, but that both have recently increased their purchases. There are no government bond issuance data available for November yet, but between August and October, the central bank and the banking system bought around 90% of all bonds issued.”