China's yield curve is steepest in two years as liquidity swells

Longer yields are being kept from falling due to expectations for economic recovery and the prospect of additional debt issuance

China’s yield curve has become the steepest in two years as a combination of flush liquidity and speculation the central bank will keep policy accommodative pushes down rates on shorter-maturity debt.

The extra yield on the nation’s 10-year bonds over one-year securities widened to 93 basis points this week, the most since June 2020, and up from as little as 45 basis points in December. At the same time, longer yields are being kept from falling due to expectations for an economic recovery and the prospect of additional debt issuance.

The nation’s shorter bonds have surged since the start of July as a consumer boycott of mortgage payments has fueled speculation the People’s Bank of China will delay any plans to tighten liquidity. The securities have also rallied after a report last week showed gross domestic product slowed to 0.4 per cent last quarter, far below the nation’s 5.5 per cent annual growth target. 

The PBoC responded this week by adding liquidity into the financial system for the first time since June through raising the size of its daily short-term cash injection to 12 billion yuan ($1.8 billion) on Monday from 3 billion yuan. 

Very flush

The steeper yield curve may be implying very flush front-end liquidity and expectations of more tolerance from the PBoC, said Albert Leung, a strategist at Nomura International in Hong Kong. Investors appear hesitant to add longer duration due to some expectations of a growth improvement and higher bond supply, he said.