U.S. 10-year Treasury yield climbs, here’s what it means for China
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BEIJING — The rapid rise in the U.S. 10-year Treasury yield to three-year highsIts gap with the Chinese counterpart has been closed, something that hadn’t happened in over a decade.
As the yields cross paths – the U.S. one rising above China’s – that theoretically reverses an investment strategy that bought Chinese bonds for the greater return they offered relative to U.S. Treasurys.
Although it’s unclear if the move will be sustained or large enough to have significant implications for investors, the market signals that this is happening are clear.
Refinitiv Eikon data shows that the U.S. 10-year Treasury yield was trading at 2.857% on Wednesday night. This is slightly lower than its Chinese counterpart of 2.873%. For the first time since 2010, the U.S. 10-year Treasury yield rose above that of its Chinese counterpart in early February. However, it has managed to maintain a slight premium over the past few days.
Analysts said that market developments reflect diverging monetary policies between the countries.
The People’s Bank of ChinaThe government is tightening monetary policy, and cutting interest rates. U.S. Federal ReserveThis includes tightening monetary policies and increasing rates.
China and America also have to face each other. different inflation dynamics,With surging prices for producers in China and India, there are smaller increases in consumer prices in China.
Chinese yuan is in focus
Investors pay attention to the potential implications of the shrinking yield gap in the Chinese Yuan. There is a risk that capital outflows could occur if the Chinese yuan falls too far.
Gao Xiang from Nanhua Futures in Hangzhou, a bond analyst said that there was no indication China or the United States would shift their monetary focus. This statement was translated by CNBC into Chinese.
Gao indicated that both sides will maintain relative independence in their interest rates. “The yuan exchange rates will serve as both a buffer and an indicator of the future in this context.”
Over the last three months, the yuan was trading at near 3-year highs against U.S. Dollars, but has been slightly weaker in recent weeks. On Tuesday, the onshore yuan was trading at 6.37 against the greenback. This is 0.38% less than the previous year.
Larry Hu, Macquarie’s chief China economist, stated in an email that China’s current high trade surplus outweighs the effect of the shrinking yield gap on yuan.
Hu explained that China’s decline in trade surplus will result in more pressure on the Chinese Yuan. He said the convergence of the U.S. 10-year yield and China’s 10 year yield was not that significant since the gap has been shrinking for more then a decade.
If a country’s exports are greater than its imports, it has a trade surplus. China posted a March trade surplus of $47.38 million, compared to $115.95 Billion in January-February.
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