(Bloomberg) -- China’s shift toward a looser monetary policy next year is spurring bullish bets that yields on its sovereign debt will further tumble from record lows.
Tianfeng Securities, Zheshang Securities and Standard Chartered Bank are among the analyst firms that predict 10-year yields will drop to as low as 1.5%-1.6% by the end of 2025. They fell five basis points to 1.86% in morning trading, adding to the five basis points decline on Monday after the readout of a key meeting of China’s top leaders. The benchmark CSI 300 Index rose as much as 3.3% in early trading Tuesday.
After a meeting of the Politburo, the leaders pledged “moderately loose” monetary policy in 2025 and “more proactive” fiscal policy — their most direct language on stimulus in years — as Beijing braces for a trade war when Donald Trump returns to the White House. Goldman Sachs Group Inc. and Morgan Stanley had projected rate cuts of 40 basis points next year prior to the statement.
The market’s moves Tuesday stand in contrast with its reaction to Beijing’s stimulus blitz delivered in late September, when bonds felt a squeeze amid expectations that investors would rush from fixed income to equities. Traders have begun shrugging off such concerns and rebuilding long bond positions since late November, partially fueled by lingering weakness in economic data and the central bank’s increased liquidity injections to cushion a rise in government debt supply.
“The Politburo meeting marks a milestone point of policy shift,” analysts including Qin Han at Zheshang Securities wrote in a note. “There’s scope for China stocks and bonds to both advance amid a moderately loose monetary policy stance and increasing attention on stabilizing equities.”
Authorities’ macropolicy combination is favorable for 10-year yields to test 1.6%, they added.
China’s sovereign bond yield rallied past several key levels in the past two weeks: 30-year yields fell below their Japanese counterparts for the first time in about two decades; and 10-year yields broke below the key psychological milestone of 2% in early December.
These shifts have caught Wall Street banks’ attention. Citigroup strategists recently recommended going long on 30-year Chinese government bonds and hedging currency risks. Goldman Sachs said it favored five-year bonds on a similar currency-hedged approach.
Chinese government bonds “remain the top option for many investors in a limited field for risk-free yield,” Lynn Song, chief China economist at ING Bank NV wrote in a note. “The low yields represent the government with a rare window of low-cost financing at a time when fiscal stimulus support and refinancing of debt are both useful.”
(Updates with more comments and background throughout.)
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