Chinese sovereign bond yields drop to their lowest since 2009 amid demand slowdown and as property market crisis enters fifth year

China’s short-term bond yields — which move inversely to prices — have fallen to levels not seen since the global financial crisis in 2009 amid rising expectations of further rate cuts next year due to weak domestic demand, the Financial Times reports. Ten-year bond yields also fell by 0.03 percentage points to 1.74.

Driving these shifts is a combination of heightened demand for bonds and sluggish consumer activity. Domestic consumption growth has been underwhelming, with retail sales falling short of expectations and imports declining more than predicted last month, the Financial Times reports separately. The decline in yields also comes on the back of increased bond purchases from banks and ins. firms, one analyst told the FT.

The property crisis is also yet to let up: Developers in the country have defaulted on USD 130 bn bonds since the crisis began — including USD 15 bn in defaults this year alone, Bloomberg reports. Just this month, the banking regulator has asked insurers to report their financial exposure to China Vanke Co. to assess how much support China’s fourth-largest developer by sales needs to avoid default.

The Chinese government is pushing back: The People’s Bank of China last week gathered some banks that it says have engaged in “aggressive” trading of sovereign bonds to caution them against illegal trading and advise them to be more “prudent.” The People’s Bank of China also decided to hold its benchmark lending rates steady this month in line with the US Federal Reserve, though it plans to make further cuts next year as part of a shift towards more aggressive support and stimulus in a bid to stimulate the economy, which includes propping up the property market. Authorities have also been slashing purchasing costs and easing restrictions on developers, while also providing state guarantees for bond sales by more stable developers.

It could take a year or two before we see results: While measures have slowed the decline, one analyst estimated that it could take another year or two before the real estate sector bottoms out, with more defaults expected next year.

MARKETS THIS MORNING-

Asian markets are in the green, with Japan’s Nikkei up 1%, South Korea’s Kospi gaining 1.3%, and Hong Kong’s Hang Seng rising 0.7%, boosted by news of a potential merger of Honda, Nissan and Mitsubishi. Meanwhile, Wall Street is heading for a positive open ahead of a holiday-shortened trading week.

THE CLOSING BELL-

The DFM rose 0.2% on Friday on turnover of AED 1.2 bn. The index is up 24.6% YTD.

In the green: Emirates Central Cooling Systems Corporation (+3.9%), Dubai Taxi Company (+3.0%) and Shuaa Capital (+2.4%).

In the red: Dubai Refreshment Company (-10.0%), Commercial Bank of Dubai (-3.3%) and Ithmaar Holding (-3.0%).

Over on the ADX, the index closed up 0.8% on turnover of AED 1.1 bn. Meanwhile Nasdaq Dubai rose 0.2%.