Chinese sovereign bonds gain as August consumer inflation grows slowest in 10 months

The Chinese sovereign bonds gained Friday after the recent showed that the country’s August consumer inflation slowed to the lowest in ten-months. On the contrary, improvement in the producer price limited the fall in bond yields.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 1-1/2 basis points to 2.807 percent, the super-long 30-year bond yield dipped 1 basis point to 3.323 percent and the yield on the short-term 3-year bonds slid 1/2 basis point to 2.375 percent by 06:00 GMT.

China’s consumer prices rose by just 1.3 percent y/y in August, lower than the market estimates of 1.7 percent y/y increase after climbing 1.8 percent y/y in July, remaining well below China’s official target of around 3 percent in 2016.

On the other hand, producer prices fell by 0.8 percent y/y in August after declining 1.7 percent y/y in July. Market was expecting a 0.9 percent y/y decline. The improvement in the producer price has been supported by a recovery in raw material costs whose outlook will be more uncertain.

“Today's data is unlikely to affect the PBoC’s monetary policy stance. Senior officials have been reiterating the priority of ‘supply-side structural reform’ and the role of active fiscal policy against the backdrop of capacity reduction and an overheating housing market. The possibility for further monetary easing has significantly declined. We continue to target the PBoC 7-day reverse repo rate at 2.25 percent through to the end of 2016,” said ANZ in a research note.

Meanwhile, PBoC sets the USD/CNY reference rate at 6.6684, 0.1 percent weaker than 6.6620 yesterday and injects 70 billion yuan liquidity in reverse repos, including 20 billion yuan in 14-day repos. The Shanghai Composite (SSEC) fell 0.13 percent to 3,092.33 by 06:10 GMT.