China’s anticipated shift towards a more accommodative monetary policy in 2025 is driving optimistic projections for further declines in its sovereign debt yields, already at record lows. Several prominent analyst firms, including Tianfeng Securities, Zheshang Securities, and Standard Chartered Bank, foresee 10-year yields potentially plummeting to as low as 1.5%-1.6% by the close of 2025. This prediction follows a recent drop of five basis points to 1.86% in morning trading, compounding the five basis point decline observed on Monday after a pivotal meeting of China’s top leadership. The benchmark CSI 300 Index reacted positively, surging as much as 3.3% in early Tuesday trading.
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Politburo Signals Policy Shift, Spurs Market Optimism
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The Politburo meeting concluded with a commitment to a “moderately loose” monetary policy and a “more proactive” fiscal policy for 2025. This explicit language, the most direct articulation of stimulus intentions in recent years, signals Beijing’s preparation for potential trade tensions anticipated with the return of Donald Trump to the White House. Prior to this statement, both Goldman Sachs Group Inc. and Morgan Stanley had projected rate cuts of 40 basis points for the upcoming year.
The market’s enthusiastic response on Tuesday contrasts sharply with its reaction to the stimulus measures implemented by Beijing in late September. At that time, bonds experienced pressure amid expectations of a rapid investor shift from fixed income to equities. However, since late November, traders have increasingly dismissed these concerns, opting instead to rebuild long bond positions. This shift is partly attributed to persistent economic weakness and the central bank’s augmented liquidity injections aimed at mitigating the impact of increased government debt supply.
Analysts Foresee Further Yield Declines, Favorable Market Conditions
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Zheshang Securities analysts, including Qin Han, characterized the Politburo meeting as a “milestone point of policy shift,” highlighting the potential for concurrent gains in both Chinese stocks and bonds. They attribute this potential to the moderately loose monetary policy stance and the growing emphasis on stabilizing equity markets. Specifically, they suggest that the current macroeconomic policy combination is conducive to 10-year yields testing the 1.6% level.
Recent weeks have witnessed China’s sovereign bond yields surpassing several critical thresholds. Notably, 30-year yields dipped below their Japanese counterparts for the first time in approximately two decades, while 10-year yields breached the psychologically significant 2% mark in early December. These developments have captured the attention of Wall Street banks, with Citigroup strategists recently advocating for long positions on 30-year Chinese government bonds, hedged against currency risks. Similarly, Goldman Sachs expressed a preference for five-year bonds using a comparable currency-hedged strategy.
Low Yields Present Unique Financing Opportunity for China
Lynn Song, chief China economist at ING Bank NV, underscored the attractiveness of Chinese government bonds, describing them as “the top option for many investors in a limited field for risk-free yield.” She emphasized that the prevailing low yields afford the government a rare opportunity for low-cost financing, particularly advantageous at a time when fiscal stimulus and debt refinancing are both crucial. This confluence of factors points to a continuing favorable environment for Chinese bonds in the coming year.
