China Bond Yields Jump as U.S. Selloff Spooks Investors

By Shen Hong Features Dow Jones Newswires

Chinese government-bond yields rose to a fresh three-year high, after a selloff in U.S. Treasurys that further worried investors already concerned about Beijing's battle on debt.

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The yield on China's benchmark 10-year bond rose 0.08 percentage point Monday, to 3.98%--its highest since October 2014. Bond yields and prices move in the opposite direction.

The world's third-largest bond market has been under pressure since early in the year, when Beijing raised short-term interest rates to discourage borrowing by speculators. The perception that reducing risk has overtaken spurring growth as policy makers' priority has been reinforced in recent weeks as the central bank has declined to inject large amounts of cash into market--though on Monday it did pump in 150 billion yuan ($22.59 billion), its biggest injection since the 394 billion yuan of Oct. 13.

People's Bank of China Gov. Zhou Xiaochuan last month warned that rising corporate debt could lead to a "Minsky moment"--named for the late American economist Hyman Minsky--in which asset prices collapse after a long period of economic growth.

"The combination of financial deleveraging, rising inflationary pressures and a resilient economy has certainly spread panic in the market, especially as some investors were forced to cut their losses," said Qu Qing, chief fixed income analyst at Hua Chuang Securities.

Concerns that a U.S. tax overhaul would widen the budget deficit sent the yield on the 10-year Treasury note up 0.07 percentage point on Friday--its biggest rise since September--to 2.397%. Higher returns on U.S. government paper make Chinese bonds less attractive by comparison. Also weighing on the Chinese bond investors' sentiment: a strong Chinese stock market. The benchmark Shanghai Composite Index hit a 22-month high Monday.

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"It's so depressing, and we've been sighing nonstop all day. It's like everything is against us today," said a Shanghai-based head of bond trading at an Asian bank.

At close to 4%, the yield on 10-year Chinese government bonds is now some distance above those on other major economies' comparable debt--notably the 0.41% yield on 10-year German bunds and the minuscule 0.05% on 10-year Japanese government bonds.

Foreign investors, mainly central banks and sovereign-wealth funds, have been more bullish on Chinese bonds: At the end of October, the latest figure available, their holdings stood at a record 1.09 trillion yuan ($164.07 billion), up from 1.04 trillion yuan a month earlier 822.15 billion yuan in January.

Beijing has eased foreign access in recent years, including with the "Bond Connect" program, which since July has allows investors with trading accounts in Hong Kong to invest in the mainland market. A recent rebound in the value of China's currency, the yuan, may have made Chinese bonds more appealing to foreign investors, said Julian Evans-Pritchard, China economist at Capital Economics. Still, they account for a negligible 1.5% of the market.

"Foreigners are still very marginal players there," said Mr. Evans-Pritchard, adding that the Chinese bonds may grow less appealing in the coming year if the Federal Reserve stays on course to raise interest rates further.

Write to Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

November 13, 2017 05:33 ET (10:33 GMT)