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China bond yields jump to three-month highs as investors pare rate cut expectations

March 10, 2025
in News
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The People’s Bank of China (PBOC) building in Beijing, China, on Friday, Nov. 8, 2024. 

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China’s sovereign bond prices fell Monday, pushing yields to their highest levels this year, as investors trimmed holdings on bets that additional fiscal spending will boost growth and push back interest rate cuts.

Yields on China’s 10-year government bond, which move inversely to prices, gained over 10 basis points on Monday to hit 1.865%, their highest level this year, according to LSEG data. It marks a rise of 25 basis points from January’s record lows.

Yields on 30-year sovereign bonds climbed above the key psychological level of 2% to reach 2.030% on Monday, while yields on the one-year note also gained 10 basis points to hit 1.643%. By 1 p.m. in Beijing, yields had pared some gains.

“Growth optimism has returned in China,” Frederic Neumann, chief Asia economist at HSBC Bank, told CNBC via email. “The National People’s Congress signaled a stronger pro-growth stance by the government, centered on fiscal easing.”

Chinese government bond yields have climbed from historic lows in January amid optimism over prospects for the economy after officials set an ambitious growth target of around 5% in a high-level government work report last week.

Beijing also announced a rare increase in its fiscal budget deficit to 4% of GDP — the highest since at least 2010 — along with a plan to issue 1.3 trillion yuan ($178.9 billion) in ultra-long-term special treasury bonds in 2025, marking an additional 300 billion bond issuance quota from last year.

An increased supply of bonds typically makes existing bonds less attractive to investors, pushing down prices and supporting yields.

Government bond issuances could be further ramped up if trade tensions with U.S. intensify, said Ju Wang, head of Greater China FX and rates strategy at BNP Paribas.

“There is still room for long-end rates to correct further on a potentially faster issuance pace of long-dated bonds, the government’s aim to boost property market and consumption, and ongoing equity rally,” Wang said.

Delaying monetary easing

Investors have dialed back expectations for interest rate cuts in the near term, as the People’s Bank of China reiterated its priority to stabilize the yuan in the face of rising trade tensions with the U.S.

At a closely-monitored press conference last Thursday, central bank Governor Pan Gongsheng repeated his stance that the central bank will cut interest rates and inject liquidity into the financial system through cuts to the amount of cash that banks must hold as reserves “at an appropriate time.”

Officials have repeatedly hinted at lowering the policy rates since late last year but haven’t yet followed through. 

Pan on Thursday reiterated that the PBOC wanted to maintain currency stability at “a reasonable and balanced level.” Preventing the yuan from weakening too quickly could be seen as a sign of goodwill in the lead up to any negotiation with U.S. President Donald Trump on a trade deal, economists said.

The Chinese offshore yuan lost around 0.24% on Monday to trade at 7.2588 against the U.S. dollar.

“Rising bond yields in China provide a counterweight against depreciation pressure on the Renminbi, especially in the context of falling U.S. yields,” Neumann said. The U.S. 10-year Treasury yield has lost over 50 basis points since January and was trading around 4.2839% on Monday.

Looking ahead, however, Neumann said the bond sell-off might “quickly run out of steam,” as the central bank prioritizes growth over exchange rate management, with the “monetary policy stance [remaining] tilted towards easing.”

Investors turn bullish

The selloff in bonds followed a rally in the Chinese offshore stock market, signaling a shift of liquidity toward riskier assets.

China bond yields jump to three-month highs as investors pare rate cut expectations

The emergence of artificial intelligence startup DeepSeek has prompted global investors to allocate more toward Chinese stocks, betting on the country’s advancement in large language models and its benefits to the broader economy.

“Investor sentiment has become more bullish following the re-rating in offshore equities triggered by DeepSeek, leading to a shift in favor of equities over government bonds,” said Carlos Casanova, senior economist of Asia at Union Bancaire Privée.

MSCI China index has surged nearly 20% this year, while the Hong Kong-listed Hang Seng Index outperformed global peers, soaring over 18% year-to-date.

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