China's 10-Year Government Bond Yield at 1.9995%... Falls Below 2% for the First Time Ever

Domestic Economy Vulnerability Snapshot
Possibility of Further Decline Raised

The yield on China's 10-year government bonds fell below the 2% mark for the first time ever. This is being analyzed as a clear indication of the fragile domestic economic situation in China, the world's second-largest economy.

According to Bloomberg on the 2nd, the yield on China's 10-year government bonds temporarily dropped by 2 basis points (1bp = 0.01 percentage points) from the previous trading day to 1.9995%. On the 28th of last month, the yield on China's 30-year government bonds also fell below that of Japan's 30-year government bonds for the first time in history.

The yield on China's long-term government bonds, which was around 4% at the end of 2020, has been on a downward trend. This is due to increased demand for safe assets like bonds (leading to lower government bond yields) as China's economy continues to struggle with a real estate market slump and deflation (falling prices amid economic stagnation).

Amid this, when the People's Bank of China cut the benchmark interest rate in September as one of the measures to stimulate the economy, this trend accelerated. Bloomberg also analyzed that the possibility of trade frictions due to the re-election of then-U.S. President Donald Trump contributed to the increased demand for Chinese bonds.

Some market participants predict that Chinese government bond yields could fall further in the near term. This is based on the analysis that deflation in China has become a new normal that cannot be easily resolved by government stimulus measures. Jin Han, an analyst at Jesang Securities, expects the People's Bank of China to cut the benchmark interest rate again in January next year, forecasting that the 10-year government bond yield could fall to 1.85% around the Lunar New Year holiday.

The concentration of demand for Chinese bonds is expected to pose many dilemmas for the People's Bank of China. The biggest problem is the weakening of the yuan against the dollar caused by the decline in government bond yields. This is seen as a factor that could fuel capital outflows from China.

However, raising the benchmark interest rate to defend the yuan is not an option either, as it could burden the already fragile domestic economy. Accordingly, there are also forecasts that the People's Bank of China might issue orders to suspend government bond trading, as it did in August.

This content was produced with the assistance of AI translation services.