China Insight: Bond market bearishness intensifies

Recall, we delivered the below predictions respectively in two issues of this publication last month:

• 11 September -- "Despite the downward pullback of the yield in recent days, we still stick with our cautiously bearish view on the bonds. We won't be surprised if the 10-year CGB yield finally reaches 3.25% or higher in Q4 if the prevailing mini-deleveraging cycle continues".
• 18 September -- "In our view, continued reluctance of PBOC to act generously will reinforce the market perception that monetary easing cycle is already over and borrowing costs will be gradually creeping upward. In case of that, there is a good chance we will see a strong selloff in bonds in October".

Basically, both predictions have already materialized as 10-year CGB yield already reached as high as 3.23%, fresh high of the year, in the middle of this month (October). That's 11bp higher than September 18's closing level.

Fundamentally, September's money supply and loan figures were announced some days ago, indicating post-pandemic credit expansion is still in good shape. That, we think, will make policymakers accelerate the pace of counter-pandemic monetary stimulus exit. As such, there is good chance liquidity will become less ample over the rest of Q4. That combined with plentifulness of bond supply as a result of the heavy fiscal spending (chart 1) will continue to keep bond yield under upward pressure. Thus, we won't be surprised if the 10-year CGB yield finally revisits 2019's year-high 3.44% by the end of the year (chart 2).

Last but not least, recent steepening of onshore CNY IRS curve (chart 3), in our view, reflects that counter-pandemic releveraging is already phased out and that what happens next could be policymakers' growing bias in favour of deleveraging (already happening to the property developers), which is definitely not a positive to the bond market. Recall, we saw notable steepening of onshore CNY IRS curve alongside with selloff in CGB bonds in Q4 2017 after President Xi stressed the importance of financial risk control in spring that year.

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