China’s 10-Year Bond Yield Nears 2% Amid Debt Selloff Concerns

China’s 10-year government bond yield is edging closer to the critical 2% mark, sparking concerns about a potential acceleration in the ongoing debt selloff. Market observers attribute the pressure to supply concerns and Beijing’s hesitation to implement further monetary easing. On Wednesday, the benchmark 10-year yield hovered around 1.93%, marking a continuation of four consecutive days of increases. Meanwhile, the 30-year yield remained steady at 2.04%, after briefly surpassing the 2% threshold for the first time since December.

The bond market has faced increasing pressure this year, primarily driven by the central bank’s decision to hold interest rates steady and refrain from cutting the required reserve ratio since September. Additionally, the rising bond supply—including the upcoming record issuance of two-year bonds on Friday—coupled with a surge in Chinese stocks, has diminished demand for fixed-income products.

In a recent note, analysts from Industrial Securities Co., including Zuo Dayong, cautioned that long-term bonds may face further corrections. “The recent bond price movements have undone the gains made since December, when market expectations were buoyed by hopes of looser monetary policy,” they wrote. They advised investors to adopt a defensive stance, recommending a reduction in bond positions and a shift toward shorter-duration bonds, while refraining from purchasing on market dips.

The bond market’s next critical test is set for Friday, when China’s Ministry of Finance is expected to sell 167 billion yuan ($23.1 billion) worth of two-year bonds, marking the largest-ever single auction of this tenor.

Meanwhile, the total annual supply of new government bonds in China is poised to rise to 11.86 trillion yuan this year. This increase follows the government’s decision to lift its budget deficit target to approximately 4% of GDP, the highest level seen in over three decades.