China bond yield tumbles after PBOC cut expected

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China bond yield tumbles after PBOC cut expected

A rally in China's sovereign bonds that pushed the benchmark yield down by the most since July may leave less room for gains after the central bank delivered the easing traders had been rushing to price in.

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The People's Bank of China announced on Monday that the yield on the 10 year bond fell five basis points to 2.82%, after Premier Li Keqiang signaled an imminent reduction in the reserve-requirement ratio. The PBOC tried to stave off expectations of more support by saying it hasn't changed policy direction.

Chinese bonds have been rallying since October due to concerns over the nation's growth and contagion from China Evergrande Group's debt crisis. While Standard Chartered Plc. Some people expect it to fluctuate around the current range as policymakers stress an intent to maintain its monetary stance when seeings declines further, and others expect it to fluctuate around the current range.

According to Hao Yang, an analyst at Nanjing Securities Co., the RRR cut came sooner than expected, which is a reflection of the PBOC's strong willingness to ease growth concerns. China's 10 year yields should stay within a range of 2.8% -- 2.9% with limited support from the RRR cut, as the market waits to see whether the easing would be effective in offsetting growth headwinds. The central bank will release 1.2 trillion yuan $188 billion of liquidity on December 15, which will reduce the RRR by 0.5 percentage point for most banks. The money will be used by banks to repay maturing policy loans and replenish long-term capital, it said. There are nearly 1 trillion yuan worth of one-year loans that are maturing on December 15.

The PBOC said that the cut was a regular monetary policy action. The prudent monetary policy direction has not changed, it said.

Becky Liu, head of China macro strategy at Standard Chartered Plc, said that the 10 year yield will fall to as low as 2.75% in the coming month. Eddie Cheung, Senior Emerging Markets strategist at Credit Agricole said the rate will end the year at 2.8%.

Financial stocks had rallied ahead of the announcement, with the CSI 300 Financials Index gaining 0.9%. A Bloomberg gauge of mainland China brokerages also rose by the same magnitude.

On Monday, China's high-yield dollar bond rose by about a cent on the dollar. Sunac China Holdings Ltd. note rose by 4.4 cents on the dollar to 66.2 cents as of 6: 37 p.m. in Hong Kong, according to Bloomberg-compiled prices.

The decision came after recent data showed the economy and industry stabilizing, although Beijing s tighter restrictions on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real estate firms.

The PBOC is bucking the trend of normalizing pandemic-era stimulus, with its markets rocked by a regulatory crackdown on everything from the property sector to technology firms. In the past three months, Yuan-denominated government bonds were one of Asia's top performers on bets that Beijing will keep its liquidity low.

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