There are signs that China is in a world of its own this year. Its bond yields have continued to fall, even as the US ones hit their highest levels in decades. Yields of other countries, including those in Europe, have continued soaring this month. So, why is this happening?
China bond yields continue falling
Data shows that short and long term government bonds in China are in a strong freefall this year. The ten-year yield fell to 1.681% today, its lowest level since July last year. It has slumped from a high of 4.10% from its highest level during the pandemic. Similarly, the five-year has dropped to 1.404%, while the 30-year has moved to 2.21%.
China vs US 10-year bond yields | Source: TradingView
In contrast, the opposite is happening in the United States, where the ten-year has jumped to 5% for the first time in nearly 2 decades. Its 2-year and 30-year have continued rising this year, leading to a surge in the amount of money that the government pays in debt. It paid over $1.4 trillion last year.
The same is happening in other countries in Asia and Europe. For example, in France, the ten-year yield spiked to 4.47%, while in Germany, the yield has soared to 3.50%.
There are a few reasons why China bond yields are in a freefall this year as those in the US rise. One, China’s bond market is seeing strong local demand from companies and pension funds, which have limited areas to park their money. As such, they are finding the bond market to be an attractive avenue.
At the same time, there are signs that the Chinese economy is diverging. While manufacturing and exports are doing well, domestic spending is struggling, especially now that the real estate industry has largely collapsed. Retail sales are growing at a fairly slow pace this year. As a result, weak consumption leads to a low appetite for businesses and households to borrow.
The prolonged property crisis has also continued this year and is having an impact on business activity in the country. Instead of borrowing capital to invest in property, households are opting to preserve capital and pay debt.
China, unlike the United States, is experiencing low inflation, which reduces the compensation that investors require to hold long-duration bonds. This has led to some easing by the country’s central bank.
Growing US public debt
Meanwhile, in the United States, the government deficit is widening, which is pushing public debt to a record high. The debt crossed the important milestone of $40 trillion last month and is now approaching the $40.2 trillion milestone.
Some credit agencies have downgraded the US in the past few years, warning that the rising debt presents major risks to the economy.
All this is happening as US relations with other countries worsen under Trump, who has added tariffs. As a result, China has been reducing its holdings of US debt in the last decade. There are also signs that Japan is reducing its holdings.
The remaining investors are asking to be compensated using a high interest rates to hold the debt. This trend will likely continue as long as the US continues its aggressive borrowing while economic growth stagnates.
On top of this, the Federal Reserve hiked interest rates Wednesday, citing relatively high inflation. Officials hinted that they will deliver another rate hike later this year.
This post Why US and China bond yields are moving in opposite directions may be modified as updates unfold
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