How China’s bond market is bucking the trend in global sell-offs

Nicholas Spiro says China, seemingly alone among major players, is seeing lower yields in its bond market due to an influx in foreign investment and more liquidity from the central bank

3-MIN READ3-MIN

While the US Federal Reserve is in the midst of raising its interest rates and the European Central Bank is ending its quantitative easing programme, the People's Bank of China has taken steps to inject liquidity into China’s economy to counteract a slowdown. Photo: Reuters

Published: 2:00pm, 8 Oct 2018Updated: 10:38pm, 8 Oct 2018

The end of a three-decade-long bond bull market has been called many times over the past several years.

Yet, every time a major sell-off has rippled through global markets – as it did last week when the yield on benchmark 10-year US Treasury bonds shot up 17 basis points to its highest level since April 2011 – the turmoil has quickly given way to a renewed rally.

This time round, however, the forces pushing up bond yields are gaining momentum. Not only is the United States’ economy firing on all cylinders, prompting the Federal Reserve to signal that it is likely to tighten monetary policy more aggressively next year than markets anticipated, the European Central Bank is terminating its quantitative easing programme in December and is expected to slowly begin raising interest rates next year.

According to data from JPMorgan, the balance sheets of the world’s three main central banks – the Fed, the ECB and the Bank of Japan – will contract next year for the first time since the 2008 financial crisis. With ultra-loose monetary policies having played an instrumental role in driving down bond yields, the withdrawal of central banks from markets is likely to finish off the bond bull market once and for all.

This year alone, the 10-year Treasury yield has surged 80 basis points, with half the increase occurring since the end of August. Its German equivalent, meanwhile, is up 30 basis points since the end of May. Even Japan’s 10-year yield, which was almost in negative territory as recently as July, has hit its highest level since January 2016.

The Bank of Japan, under governor Haruhiko Kuroda, has elected to keep its around-zero rates throughout 2018 in order to meet an inflation target of 2 per cent. Photo: Reuters