The rout in China’s bond market is expected to drag on as investors take on more risk and rotate out of fixed income products in search of better alternatives amid low interest rates.
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The shift to stocks from bonds is even more notable, given China’s sluggish economic data and a persistent deflationary trend, as investors seek greater returns, according to brokerages including Zhongtai Securities. Bonds are typically seen as safe-haven assets that can be used to hedge against weak growth.
It is not difficult to determine why investors are flocking to stocks. A fixed-income sell-off has driven up the return on the benchmark 10-year government bond to a five-month high of 1.806 per cent, with the yield falling by 17 basis points over the past three months. Meanwhile, the CSI 300 Index has risen 17 per cent over the same period.
“Sentiment in the bond market is expected to remain weak and it’s unlikely to see a substantial recovery,” said Qu Rui, an analyst at Golden Credit Rating. “The risk appetite now remains elevated and more institutional redemptions [of bonds] could be on the table.”
The turmoil in the bond market followed the biggest bull run in a decade last year, when the yield on the 10-year government bond dropped to a record low of 1.597 per cent after China’s growth outlook deteriorated. The yield on the sovereign debt slumped by 88.5 basis points in 2024, the most since a 97 basis point drop in 2014.
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The bull run on bonds reversed when Beijing took more decisive measures to combat deflation, unveiling a campaign to cut excessive capacity in green energy industries and a plan to build a major hydropower station in Tibet that analysts said would lift commodity prices.