Chinese Government Bonds Soar to Decade-High Returns, With More Gains Expected in 2025

Chinese government bonds are experiencing an unprecedented surge, poised to deliver their best annual performance since 2014, as reported by Bloomberg. Local fund managers and strategists anticipate continued gains in 2025, driven by a confluence of factors including economic uncertainty and accommodative monetary policy.

A Bloomberg index, excluding currency fluctuations, indicates that Chinese government bonds are on track to yield a 9% total return in 2024, a level unmatched in a decade. This remarkable performance is attributed to the nation's prolonged economic weakness and sluggish consumer spending, which are fueling expectations of further monetary easing by the People's Bank of China.

As a result, 10-year Chinese bond yields have plummeted by 84 basis points since January, reaching 1.71% on Thursday. This sharp decline has propelled Chinese bonds ahead of their global counterparts, solidifying their appeal as a safe-haven asset amid global economic uncertainty.

"There are a lot of uncertainties for the economy next year, with much pending on the development of trade conflicts and the dollar’s strength," said Zhang Liling, a fixed-income investment director at Bosera Fund Management Co. to Bloomberg. Bosera Fund Management Co. oversees 29.7 billion yuan ($4.1 billion) of assets.

Several prominent financial institutions, including Tianfeng Securities, Zheshang Securities, and Standard Chartered Bank, share the optimistic outlook for Chinese bonds, forecasting a further dip in 10-year yields to as low as 1.5%-1.6% by the end of 2025.

While the recent rally experienced a slight slowdown this week due to concerns over a surge in debt issuance, historical trends suggest that the local bond market will readily absorb the increased supply, particularly if the People’s Bank of China maintains its accommodative monetary policy and economic growth remains subdued.

Despite record-breaking debt issuance plans, several market players remain optimistic about the prospects of Chinese bonds in 2025. "We are still positive about bonds next year given the prospect for rate cuts," stated Zhu Zhengxing, who manages 74.5 billion yuan at Fullgoal Fund Management Co., to Bloomberg.

While the increased debt supply may reshape the yield curve, the overall direction of yields is expected to remain favorable, particularly in the short to medium-term segments.

Despite the current low yields, Zhang Liling emphasizes the enduring value of Chinese bonds as a safe-haven asset: "Very few assets offer certainty of not losing money in a deflationary environment."