10-Year Sovereign Bonds See Biggest Yield Increase Since December

Data from Sina Finance indicates that price of ten-year sovereign bonds trading on the China Financial Futures Exchange fell 1% on 30 October, while five-year sovereign bonds saw a drop of 0.7%.

The ten basis point rise in 10-year sovereign bond returns was the largest one-day increase since 15 December.

Shenwan Hongyuan said to Sina that pessimistic expectations in relation to capital availability and regulatory changes were putting pressure on debt markets, leading to a weakening in the mood of the market.

Market mood worsened further once the sovereign yields hit a new high, but looking ahead, sentiment is likely to improve, with fundamental concerns already easing.

While capital remains tight, Shenwan does not expect it to tighten further in the near future.

Capital availability is expected to stabilise in the fourth quarter, with no marked tightening of funds in the recent past.

The Chinese central bank is making pronounced efforts to maintain stable expectations, and Shenwan expects monetary policy to remain neutral towards the end of the fourth quarter.

Next year, however, should the economy see a slowdown and a slew of regulatory policies emerge, the central bank may be less willing to tighten funds in order to advance leveraging, which will gradually lead to a turnaround in pessimistic forecasts of capital availability.

With respect to regulation, the authorities evinced increasing concern from the middle of October, yet provided no clarity on policy intentions. This has led to increased trepidations on the market over potential regulatory moves, and more pessimistic forecasts.

Shenwan expects, however, that any policies launched by regulators are unlikely to be worse than forecasts, and clarification by authorities will assuage the concerns of the market.

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