Chinese government bonds continue rally, 10-year yields hit two decade low

China's government bonds continued their upward trajectory on Wednesday, buoyed by ongoing investor anticipation of forthcoming monetary stimulus to bolster growth in the world's second-largest economy.

Investors scrambled to offset existing short positions following the decline in yields while also establishing new long positions in the market, according to traders.

Concerns over a faltering economic rebound were underscored by Wednesday's data revealing a fourth consecutive month of contraction in China's manufacturing sector. 

This, coupled with escalating deflationary pressures, has intensified investor expectations for additional easing measures following China's recent major reduction in bank reserves aimed at shoring up the economy and stabilising plummeting stock markets.

The yield on the benchmark 10-year government bond dipped by nearly 2 basis points to 2.4275 per cent, marking its lowest level since June 18, 2002.

Concurrently, yields on the ultra-long 30-year government bonds plunged to a historic low of 2.645 per cent.

Meanwhile, the most actively traded contracts for both 10-year and 30-year treasury futures soared to unprecedented levels at the market's outset before moderating some of their gains.

Given the challenging economic landscape, Radhika Rao, senior economist at DBS, remarked, “We are maintaining our long 10-year Chinese government bond (CGB) position, recognising the potential for further easing ahead.”

China's manufacturing sector struggled to regain momentum at the onset of 2024, with January marking the fourth consecutive month of contraction, underscoring persistent deflationary pressures, noted Zhang Zhiwei, chief economist at Pinpoint Asset Management. 

Zhiwei added, “The real interest rate is excessively high, deterring private investment. I anticipate the PBOC to implement rate cuts in the first half of this year to stimulate domestic demand.”

With the 10-year yield now dipping below the central bank's medium-term policy rate, bond traders anticipate this breach could prompt a policy rate reduction as early as mid-February, coinciding with the People's Bank of China's (PBOC) rollover of its medium-term lending facility (MLF) loans.

"A crucial consideration remains the economic fundamentals," remarked a trader at a bond fund.

(With Reuters Inputs)