Yields on China's benchmark 10-year government bonds stood at 2.745%, having dipped on Friday to 2.73%,
which was the lowest since November 2022, when China's stringent
COVID curbs were still in place.
At the short-end, 3-month interest rate swaps were down 20 basis points in two weeks.
Yields, which move inversely to bond prices, had surged in
the first quarter of this year after China dropped its
zero-COVID protocols. But disappointing data, like the
unexpected contraction in April manufacturing activity,
indicated a patchy economic recovery.
"With the economy likely to move out of its post-pandemic
sweet spot towards the end of the second quarter, we see a
higher chance of rate cuts in the second half (of the year),
especially if the Federal Reserve stops rate hikes and starts
rate cuts," said Ting Lu, chief China economist at Nomura.
Three mid-sized Chinese lenders on Friday reduced interest
rates on some deposits, after Reuters reported that China nudged
banks to cut deposit rates further, in its latest efforts to
channel the country's vast savings pool into spending and more
productive investments.
Analysts believe lowered deposit rates should improve banks'
net interest margins and allow them to cut lending rates to
boost the economy.
"The deposit rate cut certainly boosted market sentiment and
spurred bond bulls to make more bets," said a trader at a
brokerage.
The 5-year non-deliverable interest rate swap (NDIRS) , which reflects market projections for future
rate moves, has fallen more than 20 basis points in the past
month to its lowest level since November.
While the prospect of lower yields and hence rising bond
prices should attract foreign portfolio flows into Chinese
government bonds (CGBs), analysts doubted whether that would
happen given the widening differential between U.S. and Chinese
yields.
"Outflows from CGBs are expected to persist as yield
differentials are still in negative territory and U.S.-China
tensions could weigh on foreign (buying) interest," said
analysts at DBS.
China's yuan eased 0.6% against the dollar in
April, when the greenback lost 0.9% against a basket of
major currencies. Institute of International Finance (IIF) data
showed net outflows for Chinese securities in April, including
$3.8 billion from equities and $1 billion from debt.
Meanwhile, regulators from Beijing and Hong Kong will soon
to launch the interest rate Swap Connect scheme on May 15,
which will allow investors to access onshore interest rate
derivatives that will improve their ability to hedge.
"The Swap Connect provides a more efficient way for
international investors to hedge yuan bond investments
accurately," said Freddy Wong, head of Asia-Pacific fixed income
at Invesco Ltd.
(Reporting by Winni Zhou in Shanghai, additional reporting by
Georgina Lee in Hong Kong
Editing by Vidya Ranganathan & Simon Cameron-Moore)
