Chinese debt sell-off likely to continue as yield advantage over US bonds disappears

The yield on the 10-year Treasury note climbed to 2.78 per cent on Monday, surpassing the 2.75 per cent premium for China’s 10-year government bond

Analysts warn that ongoing capital outflows coupled with growing depreciation pressure on the yuan may be destabilising for China’s financial markets

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Global investors have withdrawn money from China on an “unprecedented” scale since Russia invaded Ukraine in late February. Photo: Bloomberg

Published: 11:00am, 13 Apr 2022Updated: 11:36am, 13 Apr 2022

Capital outflows from China are expected to continue in coming weeks after an exodus of foreign funds from Chinese sovereign bonds in March, experts said, as the country’s yield advantage over US Treasuries disappeared for the first time since 2010.

On Monday, 10-year US yields climbed to 2.78 per cent, supporting the US dollar and surpassing the 2.75 per cent yield for China’s benchmark 10-year government bond.

“Looking back, whenever the interest rate gap between China and the United States rapidly declined … international capital flowing out of China would speed up,’ Liu Yaxin, a macro strategist at China Merchants Securities, said in a note on Tuesday.

“From the perspective of US inflation and China’s economic fundamentals, the reversal of China and US interest rates may continue for a period of time, international capital outflows will still continue and, in the short-term, the yuan exchange rate [with the US dollar] will face depreciation pressure.”

Global investors have withdrawn money from China on an “unprecedented” scale since Russia invaded Ukraine in late February, according to a report by the Institute of International Finance (IIF) last month.