Chinese 10-year bond yields likely to touch 3 pct mark on revival of economic growth, inflation

The Chinese 10-year bond yields are expected to touch the 3 percent mark in the near term, following strong revival of economic growth and return of inflation prospects within the economy. The recent release of upbeat economic data, coupled with recovery in consumer prices is likely to pressurize the country’s sovereign bonds.

The world’s second-largest economy’s consumer inflation rose for the second straight month during the period of October. China’s consumer prices increased by 2.1 percent y/y in October after 1.9 percent y/y; in line with estimates, while producer price increased by 2.1 percent y/y in October after 0.1 percent y/y; estimates were for 0.9 percent y/y.

On Thursday, the yield on the benchmark 10-year bonds, which moves inversely to its price, rose 1-1/2 basis points to 2.794 percent, the long-term 30-year bond yield climbed 1 basis point to 3.226 percent and the yield on the 5-year bonds gained nearly 3 basis points to 2.534 percent.

Moreover, bond prices are likely to fall as investors revised the outlook for the U.S. interest rates after Donald Trump's victory, with the probability of a December rate hike by the Federal Reserve going from as low as 30 percent to as high as 82 percent.

Further, President Trump has indicated that he would increase fiscal spending and adopt more protectionist trade policies that could support growth and inflation, analysts said. Rising inflation tends to erode the value of bonds, pushing yields higher, Reuters reported.

China's blue-chip CSI300 index rose 1.12 percent to 3,390.61 points at the end of the trading session and the Shanghai Composite Index surged 1.37 percent to 3,171.28 points.

At 18:10GMT, USD/CNY rose 0.44 percent to 6.80, a fresh 6-year high, compared to previous close of 6.77. Meanwhile, offshore Yuan is currently around 6.8250, just off yesterday's 6.8375 record high. Also, the People’s Bank of China (PBoC) set the USD/CNY reference rate at 6.7885, 0.08 percent weaker than 6.7832 yesterday.