China’s government bond market, which saw a surge in demand last year, may be nearing the end of its recent rally as yields on long-term sovereign bonds trade at their steepest discount in over a decade. This week, the yield on 30-year bonds fell 10 basis points below the overnight interbank rate, marking the largest discount since December 2013. The drop in yields has been accompanied by a slowdown in activity in the repurchase market, indicating that borrowing to buy government bonds may no longer be as attractive to investors seeking yield-driven returns.
In 2024, Chinese government bonds provided their highest returns in a decade as concerns over the country’s economic outlook and a lack of other high-yield investment options boosted demand. Yields have continued to fall into 2025, driven by fears that a potential global trade war could exacerbate economic slowdowns. However, actions by Chinese authorities to cap the yuan’s depreciation and delay interest-rate cuts have helped stabilize borrowing costs and bond yields.
Stephen Chiu, chief Asian foreign-exchange and rates strategist at Bloomberg Intelligence, noted that the negative carry—where borrowing costs exceed the return on bonds—could deter further purchases. “There could be risks of yields rebounding as current levels might be too low relative to policy rates and fundamentals,” Chiu said, pointing out that China’s 30-year bond yields are approaching their lowest levels since 2004.
At the same time, China Development Bank bonds, which have traditionally offered slightly higher yields than government bonds, have also seen a drop. The yield on 10-year policy bank bonds slipped to 1.6% this week, the lowest level since 2003, erasing the yield gap with similar government bonds for the first time in 19 years.
Frances Cheung, head of FX & rates strategy at Oversea-Chinese Banking Corp, remarked that the rally in Chinese government bonds (CGBs) may be losing steam due to yields already being at historically low levels. The ongoing efforts by China’s central bank to stabilize the yuan, including tight liquidity measures, may further dampen demand for bonds. This week, the overnight repo rate surged to a one-month high before easing.
Despite these signs of cooling, analysts still anticipate that bond demand could revive in the future. Expectations of potential interest rate cuts by the People’s Bank of China (PBOC) could lead to a re-steepening of the government yield curve, with short-term yields falling more sharply as market participants anticipate further monetary easing. As for long-term rates, analysts expect them to stabilize in the wake of fiscal stimulus measures.
The delay in rate cuts from the PBOC has pushed short-term yields higher, leading to a flatter yield curve. However, as expectations for more easing mount, the bond market may see renewed interest later in the year.
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