(Bloomberg) — China’s 10-year government bond yield is approaching the closely watched 2% level, amid concerns that a recent debt selloff may accelerate on supply pressures and Beijing’s reluctance to ramp up monetary easing.
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The benchmark yield hovered near 1.93% on Wednesday following four straight days of increases. The 30-year yield was steady at 2.04%, after it surged past the 2% level for the first time since December.
Chinese bonds have come under pressure this year as the central bank has refrained from lowering interest rates or banks’ required reserve ratio since September. Increased supply, including a planned record issuance of two-year notes on Friday, as well as the recent rally in Chinese stocks also have cut appetite for fixed income products.
“There is likely more room for the long-end bonds to correct, as the recent moves have given up gains since December when the market traded on expectations of looser monetary policy,” Industrial Securities Co. analysts including Zuo Dayong wrote in a note. “Investors should remain defensive and we advise lowering of positions and moving to shorter tenors, and should refrain from buying the dips.”
The next crucial test for the world’s second-biggest debt market will come on Friday, when China’s finance ministry is slated to sell 167 billion yuan ($23.1 billion) of two-year bonds, the largest-ever offering of the tenor in a single auction, according to Bloomberg compiled data.
Meantime, annual supply of new government bonds in the world’s No. 2 economy is set to increase to 11.86 trillion yuan this year, after officials raised the general budget deficit target to around 4% of gross domestic product, the highest level in more than three decades.
–With assistance from Wenjin Lv.
(Updates with analyst comment and details of upcoming bond auction)
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