Rising Inflation Risks Crimping China’s Standout Bond Rally

(Bloomberg) -- The world-beating rally in China’s sovereign bonds fueled by policy easing bets may have some ways to go, but inflation data this week could provide a reason to slow the bullish momentum.

The country’s bonds are the only gainers this year in the Bloomberg Barclays Global Treasuries benchmark index, on signs that authorities may be willing to loosen monetary policy to support the slowing economy. However, a resurgence in the inflation reading Monday could come in the way of possible easing plans from the People’s Bank of China.

Producer prices, which have demonstrated a stronger link to Chinese government bond yields than consumer prices, are already running red hot after hitting a 13-year high of 9% in May and only easing marginally in June, according to the National Bureau of Statistics. A Bloomberg survey of economists expects the gauge to ease further to 8.6% in July.

China’s benchmark 10-year yield has fallen for eight straight weeks. The bond rally sparked by a surprise cut in banks’ reserve ratio requirement last month has extended after a concern over regulatory crackdowns spurred haven bids. Moreover, the country’s leaders vowed at a recent Politburo meeting to keep liquidity ample, solidifying easing expectations.

All these factors along with the resurgence of coronavirus cases in China have prompted analysts from JPMorgan Chase & Co., HSBC Holdings Plc and BofA Securities to recommend bullish expressions in Chinese government bonds.

“The risk of the spread of delta variant in China cannot be underestimated,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities Pte in Singapore. “Higher PPI is unlikely to derail the prevailing constructive sentiment in China’s government bonds, although that market might need cooler heads before pricing in additional easing by the PBOC.”

Below are the key Asian data and event due this week:

• Monday, August 9: China CPI and PPI; Taiwan trade balance; Malaysia industrial production
• Tuesday, August 10: Australia business and consumer confidence, Philippine 2Q GDP
• Wednesday, August 11: Singapore 2Q GDP
• Thursday, August 12: New Zealand 3Q 2-year inflation expectations, Philippine central bank policy decision; India CPI, industrial production
• Friday, August 13: Malaysia 2Q GDP and BoP current account balance

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