The yield gap between Chinese and US 10-year sovereign bonds widened to the most on record, underscoring the policy divergence between the two nations while heightening the risk of outflows from the mainland.
The benchmark 10-year US Treasury yield climbed to 4.85% on Wednesday, the highest since 2023, while its similar-maturity Chinese counterpart held steady at 1.68%. That drove the yield gap between the two to an all-time high of 317 basis points, according to data compiled by Bloomberg dating back to 2002. China’s yield disadvantage extends beyond US debt, with Japanese and UK yields sitting near multi-decade highs.
The record spread reflects a sharp monetary policy divide: the Federal Reserve is expected to raise interest rates to fight inflation, while the People’s Bank of China keeps its policy loose to support growth. Onshore banks have also piled into government bonds amid a dearth of attractive investment options and sluggish loan demand, helping anchor yields.
“The widening yield gap reflects increasingly divergent macro and policy cycles,” said Wee Khoon Chong, senior market strategist for Asia Pacific at BNY in Hong Kong. “US Treasury yields have risen as markets shifted from expecting rate cuts to pricing further tightening. By contrast, Chinese government bond yields have continued to decline amid weak domestic demand, lingering disinflation and greater demand for defensive assets.”
Crucially, the depressed onshore yields have done little to dampen the yuan’s resilience, with the currency having climbed over 4% against the dollar this year to outperform all but one of its Asian peers. The gains have been underpinned by China’s resilience to energy supply shocks, its strong exports and the central bank’s tolerance for a stronger currency.
The yuan was little changed at 6.7061 per dollar in onshore trading on Thursday, near its strongest level since 2023. The yield on China’s 10-year government bond is hovering around the lowest level in more than a year.
Still, the record yield disparity keeps the threat of capital outflows firmly on the radar for traders, especially as local funds look abroad for investments with higher returns.
China raised quotas for approved investors to buy overseas assets for the second time this year, as part of its efforts to expand official channels for outbound investment. Separately, the annual limit of Southbound Bond Connect, which allows mainland institutional investors to buy offshore bonds through Hong Kong has also been expanded this year to 800 billion yuan ($119 billion) from 500 billion yuan.
Despite the outflow pressures, China’s strict capital controls limit disorderly outflows. Earlier this year, Beijing launched its most forceful crackdown on illicit cross-border stock trading to stem capital flight and also imposed taxes on its citizens who were illegally buying and selling shares offshore.
Low foreign exposure in local debt also helps cushion the market. Foreign funds’ holdings of Chinese government bonds accounted for just 4.6% of the total market as of the end of July, according to Bloomberg calculations based on data from China Central Depository and Clearing Co.
Some offshore investors still view onshore paper as a compelling investment as domestic price pressures remain relatively muted.
“Mainland China does not have the West’s inflation problem, and that is a big reason why Chinese government bonds have outperformed the rest of the world so strongly,” said Ian Samson, a portfolio manager at Fidelity International. “They can play an increasingly large role in investor portfolios as a store of value.”
“A theme in our portfolio has been moving out of US and European government bonds to places that we see better inflation fundamentals and more compelling yields. You can definitely put China in that bucket,” he said.
Written by: Bloomberg News
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