China's Short-Term Bond Yields Plunge to 2009 Low Amidst Easing Policy

China's short-term sovereign bond yields have plummeted to their lowest levels since the 2008 global financial crisis, reports the Financial Times, as concerns over weak domestic demand bolster bets on further central bank easing. The yield on one-year bonds fell to 0.92%, marking a 14-year low, while ten-year yields also dropped to 1.74%.

The People's Bank of China (PBoC) recently announced that both one-year and five-year loan prime rates would remain unchanged, reinforcing market expectations for further rate cuts in 2025. The seven-day reverse repo rate, the PBoC's main policy tool, currently stands at 1.5%.

This recent bond-buying frenzy follows November data that showed retail sales falling short of forecasts and imports declining more than expected, raising concerns about weak domestic demand. However, Wei Li, a portfolio manager at BNP Paribas Asset Management, noted that while consumption still needs a boost, "recent stimulus measures have begun to take effect."

Li also pointed out that increased demand for treasury bonds from banks and insurance companies at year-end has contributed to the decline in yields.

Last week, China loosened its monetary policy stance for the first time in 14 years, signaling a commitment to boosting the economy and domestic consumption next year. The PBoC has pledged to cut banks' reserve requirement ratios and interest rates to ensure ample market liquidity.

China's bond market is often viewed as a gauge of economic growth expectations, with policymakers seeing lower yields as a negative indicator. In an attempt to curb local financial institutions from piling into government bonds as a safe haven, driving down yields, the PBoC recently summoned some banks deemed to have engaged in "aggressive" sovereign bond trading.

The central bank cautioned these institutions to be mindful of interest rate risks and to adopt "prudent" investment behavior in bonds. The PBoC also reiterated its "zero tolerance" policy towards illegal activities in the bond market, according to Financial News, a PBoC-affiliated publication.

However, the PBoC clarified that it would not interfere with "legitimate" investment activities, a more measured tone than its earlier warnings this year regarding risks akin to the Silicon Valley Bank collapse.

Yields on Chinese sovereign debt across all tenures have been declining since the start of the year, as smaller Chinese banks with limited domestic investment options seek refuge in the relatively safe government bond market. The 10-year note yielded 2.56% at the beginning of the year, while the 30-year note yielded 2.84%.