Chinese sovereign bonds trade lower amid inflation, global rout; 10-year yields steadily approaches 3 pct mark

The Chinese sovereign bonds continued to trade lower Tuesday as surging inflation and signs of an improving economy weaken demand for the safe-haven assets.

We also maintain our previous forecast that the country’s benchmark 10-year treasury yields will likely touch the 3 percent mark in the near term.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 3-1/2 basis points to 2.888 percent, the long-term 30-year bond yield climbed 4 basis points to 3.310 percent and the yield on the 5-year bonds bounced 3-1/2 basis points to 2.309 percent.

The Chinese sovereign bonds have been closely following developments in the U.S. debt market. The United States benchmark 10-year Treasury yield bounced to 2.22 percent for the first time in 2016.

Also, Treasury bubble collapsed as the probability of a December rate hike by the Federal Reserve jumped to 92 percent from previous 80 percent.

Moreover, the People's Bank of China (PBoC) official press agency Xinhua News said that China is expected to keep prudent monetary policy and the possibility of rate, RRR cut is low. Said CPI growth may be around 2 percent this year.

In term of latest economic data, China’s industrial production expanded by 6.1 percent y/y in October at the same pace as September; estimates were for 6.2 percent y/y. Also, retail sales rose by 10.0 percent y/y in October after jumping 10.7 percent y/y in September; estimates were for 10.7 percent y/y.

Additionally, fixed asset investment increased by 8.3 percent y/y in January-October after 8.2 percent y/y in January-September; estimates were for 8.2 percent y/y.

Also, speculation of a rise in government spending by the newly elected President of the United States, Donald Trump will spur the economic growth of the States, lending a helping hand to its inflation prospects as well, raising probabilities of a December interest rate hike by the Federal Reserve.

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.

Meanwhile, People's Bank of China sets the USD/CNY reference rate at 6.8495, 0.30 percent weaker than 6.8291 yesterday and injects 185 billion Yuan liquidity in reverse repos, including 15 billion Yuan in 28-day repos and 70 billion in 14-day repos.

The China's blue-chip CSI300 index fell 0.19 percent to 3,423.74 points and the Shanghai Composite Index dipped 0.28 percent to 3,201.28 points.