Chinese sovereign bonds rally on lower inflation; 10-year yield crashes to lowest since 2009

The Chinese sovereign bonds rallied Wednesday after data showed that the country’s both consumer and producer price inflation remained weak in July as the world’s second largest economy continues to battle weak demand, creating pressure on the PBoC for a further innovative monetary policy easing.

Moreover, the 10-year treasury yield fell 3 basis points and hit a post-financial crisis low of 2.71 percent, the yield on super-long 30-year bond dipped 5-1/2 basis points to 3.272 percent and the yield on short-term 3-year note slid 2-1/2 basis points to 2.383 percent by 05:00 GMT.

On Tuesday, China's CPI inflation eased to 1.8 percent y/y in July, in the line of market expectations of 1.8 percent y/y, as compared to 1.9 percent y/y in June as food inflation moderated to 3.3 percent y/y in July from 4.6 percent y/y in June. This print lost the momentum for third straight month, putting it further below the government target of 3 percent for the year.

Additionally, China's PPI declined for a 53rd consecutive month by 1.7 percent y/y in July, against market consensus of -3.2 percent y/y, after -2.6 percent y/y reading seen in June.

According to China’s state information centre researchers, the fiscal year 2016 inflation is projected to come in at 2.0 percent y/y, while PPI is seen falling by 2.7 percent y/y. Similarly, retail sales growth is expected to slow down in the second half of 2016 due to downward economic pressure.

Meanwhile, China sets the USD/CNY reference rate at 6.6530, 0.1 percent stronger than 6.6594 yesterday. The Shanghai Composite (SSEC) tumbled 0.02 percent to 3,025.05.