BEIJING: China’s yield advantage over Treasuries disappeared for the first time in more than a decade, paving the way for more capital outflows to follow the recent record exodus from the Asian nation.
The yield spread between Chinese 10-year bonds and comparable Treasuries turned negative yesterday, the first time it has done so since June 2010.
The move has been coming for weeks as the Federal Reserve starts on an aggressive rate-hike cycle while China looks set to ease further.
Already, global funds have have sold almost 90 billion yuan (US$14bil or RM59.2bil) of Chinese sovereign debt in the past two months as the nation’s yield premium vanished. As investors including Pacific Investment Management Co and AllianceBernstein Holding LP cut holdings, analysts are starting to question when the yuan would feel the knock-on impact and weaken. “Treasuries have been pricing in a multitude amount of hikes,” said Edmund Goh, head of China fixed income at abrdn Plc.
“Investors are concerned about yuan valuation if China no longer has a higher interest rate advantage.”
The onshore yuan dropped 0.5% in March against the dollar, and was down 0.1% yesterday to trade at 6.3724. There is growing expectation that the People’s Bank of China would have to ease further – with a key lending rate in focus this week – as the economy struggles with widening Covid lockdowns.
The premium on China’s 10-year bonds has fallen from more than 100 basis points since the start of the year as money markets price the sharpest pace of Fed tightening in almost three decades.
Outflows from China’s debt markets will continue in the short term, according to Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group.
He expects the US yield will have a 15 basis point advantage over Chinese peers next year, with 10-year Treasuries at 3%.
Global funds held 10.8% of Chinese sovereign bonds as of last month, compared with 11.1% in February. Goldman Sachs Group Inc earlier trimmed its bond inflow forecast for China to US$100bil (RM423bil) this year, from as much as US$140bil (RM591.8bil). — Bloomberg