Chinese sovereign bonds approach biggest fall in three years; look to short positions

Chinese sovereign bonds have approached for the biggest fall in three years, with the yield curve widening to 2-month high as signs of an improving economy stood in the way of demand for safe-haven government bonds. Investors shifted their interests towards buying of riskier assets including equities and oil.

The yield curve on the Chinese government t bonds rose to 66 basis points on Monday. The gap has been forced apart by a surge in the longer-term yield, with a central bank effort to reduce leverage in the financial market and a global selloff adding to the pressure.

According to National Interbank Funding Center prices, the 10-year yield on government debt rose two basis points to 2.86 percent as of 12:27 p.m. in Shanghai, taking a seven-day advance to 13 basis points. Further, the overnight repurchase rate in Shanghai climbed six basis points to 2.28 percent, while one-year interest-rate swaps rose two basis points to a 19-month high of 2.87 percent.

In addition, the People’s Bank of China injected funds into the financial system for the second day, adding a net CNY90 billion (USD13.2 billion) on Monday, data compiled by Bloomberg showed. The monetary authority drained cash for seven days in a row previously, pulling a net CNY659.1 billion.

"There’s no positive news for bonds in the short-term to support the market. We have accelerating inflation, stabilizing economy, an external market selloff -- all these are affecting the long-end of the curve more than the short-end, leading to a steepening," Bloomberg reported, citing Cheng Peng, Analyst, Fortune Securities Co.

In the currency market, the yuan fell as the PBOC set its daily reference rate at the weakest level in more than seven years. The Chinese currency fell as much as 0.17 percent to 6.8263 per dollar, the weakest since June 2010, in Shanghai. The exchange rate in Hong Kong’s overseas market dropped to 6.8340.

We suggest that investors should short their positions while targeting 10-year yield at 3 percent in the near-term.

Meanwhile, at 8:40GMT, China's benchmark stock index, Shanghai Stock Composite Index was trading 0.45 percent higher at 3,210.37.