Rate-cut hopes push China's 10-year bond yield to the lowest in 2 decades

China's Shanghai Composite fell 0.6 percent in trade on January 30 while Hong Kong's Hang Seng dropped 2 percent.

The yield on China's benchmark 10-year government bond fell to its lowest level in over two decades amid expectations of further monetary easing on the back of a sluggish economic recovery and a selloff in the stock market.

The yield on the 10-year sovereign note slipped to 2.48 percent on January 30, a level last seen in 2002.

Expectations of further monetary easing gathered pace after a Hong Kong court ordered China's property giant and the world's most indebted developer the Evergrande Group to liquidate its assets as it stares at bankruptcy.

Following the court order, China's Shanghai Composite fell 0.6 percent on January 30, while Hong Kong's Hang Seng dropped 2 percent.

Housing sector slump

China is going through an extended housing slump and concerns over the impact of Evergrande's fall on the country's already fragile property sector fanned hopes of the government stepping in to offer support.

Investors are anticipating policymakers to ease monetary policy and deploy more stimulus to kickstart the country's growth cycle, leading to a fall in bond yields.

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The government, too, has begun loosening its monetary policy hold, as it cut the amount of cash banks need to set aside as reserves,  known as the reserve-requirement ratio, in a surprise move last week.

“The pressure is definitely for yields to go lower due to expectations for a rate cut," Woei Chen Ho, an economist at United Overseas Bank, told Bloomberg. “For longer term yields, the market is also pricing the expectation that growth in the coming years will settle into a lower range.”

“Market expectation for a rate cut in February is gaining traction, especially after PBOC’s surprising announcement to cut RRR,” Ming Ming, chief economist at Citic Securities, told Bloomberg.

Beijing also opened the door to its bond trading toolbox to overseas investors earlier in January to attract more buyers and boosting market sentiment.

Officials have also promised to broaden foreign access to the onshore market, particularly in the realm of repurchase agreements. These agreements, commonly used by traders, involve borrowing and lending of short-term funds using yuan bonds as collateral.

Also Read | Stocks in Asia slip as China property sector worries weigh

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