China bonds in focus: China's government bonds experienced a rally on Friday as investors anticipated further rate cuts amid the backdrop of the largest-ever reduction in mortgage rates. 

The move signals a response to declining risk appetite, evidenced by a pause in local share gains after a sustained winning streak.

The decision to slash the benchmark mortgage rate by 25 basis points, the most crucial cut since its introduction in 2019, surpassed analysts' expectations. This major reduction fuelled market speculation of additional monetary easing measures to bolster the recovery of the world's second-largest economy.

March delivery thirty-year treasury futures surged to their highest level since the contract's inception in 2023. Concurrently, benchmark 30-year yields descended to a record low of 2.5720 per cent. 

Similarly, the yield on benchmark 10-year government bonds dipped to 2.39 per cent, marking its lowest level since June 2002.

In the derivatives market, one-year interest rate swaps, which gauge investor sentiment regarding future funding costs, plummeted to 1.86 per cent on Friday, reaching their lowest point since August 2023. 

The trend suggests that many investors are factoring in the possibility of further monetary easing measures.

Wang Tao, Chief China Economist at UBS, highlighted China's persistent growth challenges amidst a property downturn and sluggish household consumption recovery, coupled with deflationary pressures. 

She anticipates that the People's Bank of China (PBOC) will continue to cut policy rates in the coming months to counteract deflationary pressures and support economic growth. However, concerns about maintaining the stability of the yuan exchange rate and banks' net interest margins might constrain the extent of these cuts.

Tao suggested that if the property market fails to stabilise in the coming months, the PBOC could consider more substantial cuts beyond the anticipated 10 to 20-basis point medium-term lending facility (MLF) rate cut and another 25-basis-point reserve requirement ratio (RRR) cut this year.

While China's new home prices exhibited a slowdown in month-on-month declines in January, major cities showed signs of stabilisation, albeit against a backdrop of continued nationwide downward trends despite government efforts to stimulate demand.

A correction in A-shares also contributed to the supportive sentiment in the bond market, with Chinese stocks slipping on Friday, potentially ending an eight-session winning streak.

(With Reuters Inputs)