Citi recommends buying China’s 30-year government bonds as expectations for weak economic growth support the case for lower long-term yields, according to a Sept. 28 Bloomberg report on Citi’s China bond recommendation.
The call comes as China’s ultra-long government debt continues to attract demand. The 30-year Chinese government bond yield closed at 2.112% on Sept. 24, down from 2.267% at the end of August. China’s long-term bond market has increasingly diverged from major global markets, where longer-dated yields have faced pressure from inflation, fiscal concerns and expectations for higher government borrowing costs.
For China, the focus remains on weak domestic demand, subdued credit growth and the potential for additional policy support.
Weak Growth Supports China’s Long-Duration Bonds
Citi’s recommendation centers on the relationship between economic growth and long-term interest rates. When investors expect weaker growth and limited inflation pressure, they may anticipate lower interest rates ahead, supporting demand for longer-maturity government debt.
Data published by the China Financial Information Network showed the 30-year government bond yield at 2.08% on Sept. 24, down about five basis points from Sept. 18. The 10-year yield was 1.67%, while the one-year yield stood at 1.23%.
The performance of the longest maturities has been particularly strong. China’s 30-year government bond futures reached a new high for the year on Sept. 22 before pulling back slightly. Recent economic data provide part of the explanation. China's credit demand remains subdued, while weakness in the property market continues to weigh on domestic activity. The combination has increased attention on whether policymakers will need to provide additional support to the economy.
The bond market is also responding to liquidity conditions. The China Financial Information Network’s latest bond-market report said the central bank injected 4.397 trillion yuan of net liquidity through open-market operations on Sept. 28, while short-term funding rates moved lower.
The market's expectation of continued liquidity support can reinforce demand for government bonds, particularly when investors see limited opportunities for stronger economic growth in the near term. The recent move in yields has been significant. The 30-year yield fell from 2.184% on Aug. 31 to 2.112% on Sept. 24, according to historical China bond-yield data.
The difference between short- and long-duration debt is important because longer-maturity securities generally experience larger price movements when yields change. A further decline in yields could therefore generate additional price gains for existing holders, while a reversal could produce larger losses.
PBOC Watches Risks From the Bond Rally
The strength of the ultra-long bond market is also drawing attention from Chinese regulators.
The People's Bank of China is considering additional measures to monitor banks' exposure to long-duration bonds and funds, according to a Reuters report on the PBOC’s proposed monitoring measures. The proposed changes had not been finalized at the time of the report.
The potential measures highlight a risk surrounding the trade. If financial institutions build large positions in long-duration securities, a sudden increase in yields could lead to sizeable mark-to-market losses.
That risk is particularly relevant after the recent rally. China's bond market has attracted investors partly because domestic government yields remain low relative to the country's weak growth outlook. The latest Chinese bond-market data show the 30-year yield substantially below its late-August level, although the market has experienced periods of profit-taking.
Trading on Sept. 28 provided an example of that volatility. The 30-year government bond futures contract fell 0.20%, while the yield on a 30-year ultra-long government bond increased 0.85 basis points to 2.1155%, according to the China Financial Information Network’s daily bond report.
For Citi's trade to continue working, economic weakness would need to remain strong enough to keep downward pressure on long-term yields. A stabilization in domestic demand, stronger property activity or a shift in monetary-policy expectations could instead reduce demand for ultra-long bonds.
The latest economic backdrop remains mixed. China's export sector has provided support to overall activity, while domestic demand and the property market remain more subdued. That divergence leaves investors watching whether external demand can offset weakness inside the world's second-largest economy.
The direction of China’s 30-year government bond yield will ultimately depend on that balance between growth, inflation, liquidity and policy.
For now, Citi's recommendation reflects the view that China's weak-growth environment can continue supporting long-duration government debt despite the substantial decline in yields already recorded this year.