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Citi Research Backs China's 30-Year Bonds as US Treasury Yields Surge
Citi Research has signaled a bullish outlook on China's ultra-long government bonds, predicting further yield compression to 1.8% for 30-year debt and 1.6% for 10-year notes. This forecast contrasts sharply with climbing US Treasury yields and…
Citi Projects Deeper Yield Declines in China's Ultra-Long Bonds
Citi Research has adopted a bullish stance on China's 30-year government bonds, projecting a further decline in yields even as US Treasury yields trend higher. Analysts at the Wall Street institution advised investors to go long on China's 30-year sovereign debt, anticipating its yield to compress towards 1.8%, while the 10-year yield could approach 1.6%.
This outlook stems from an expected reduction in supply pressures and more favorable market dynamics for China's ultra-long government bonds in the fourth quarter. Rohit Garg, Citi's Singapore-based head of EM Asia Rates and FX Strategy, noted in the report that "China’s recently announced 360 billion USD [53.7 billion USD] recapitalisation plan for some major financial institutions may boost duration demand, especially for the ultra-long end."
On Tuesday, China's 30-year special treasury bond yield reached a daily low of 2.11%, while the 10-year government bond traded at 1.68%, close to a one-year low. Earlier in September, Beijing injected 360 billion USD into eight state-owned financial institutions, with 300 billion USD sourced from the Ministry of Finance and the remaining 60 billion USD from the state tobacco monopoly.
Drivers of China's Bond Performance
Citi analysts indicated that China's 10-year yield has room to decline towards 1.6%, citing subdued credit demand that limits upward yield pressure. The People's Bank of China's ongoing bond purchases are expected to provide a structural source of demand, further supporting this trend.
By mid-September, China had issued 90% of its planned 1.3 trillion USD in ultra-long special treasury bonds for the year, with the remaining allocation likely to be issued in October. Despite the positive outlook, analysts highlighted potential risks, including stricter regulatory constraints that could impede a rally in ultra-long bonds and aggressive new policy support that might trigger significant back-end selloffs.
China's August credit data reflected weak credit activity. New renminbi loans amounted to just 60 billion USD, and total social financing increased by 1.66 trillion USD, both figures falling short of expectations. Garg commented, "Weak domestic demand and subdued credit creation should continue to weigh on the growth outlook and keep duration demand well supported, in our view."
Contrasting Trends in Global Sovereigns
Concurrently, China's holdings of US Treasuries reached an 18-year low in July, declining to 618 billion USD from 633.4 billion USD in June, according to US Treasury Department data. Foreign countries' overall holdings also fell for the second consecutive month amidst growing apprehension regarding the sustainability of American government debt.
The US 10-year Treasury yield hit 5.25% on Tuesday, while the 30-year government bond yield traded at 5.56%, marking its highest level since 2004.
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