The 10-year Treasury yield in the United States has surged fast to three-year highs, closing the gap with its Chinese equivalent for the first time in more than a decade.
As the rates cross, with the US one climbing above China’s, an investment strategy that bought Chinese bonds for the higher return they promised relative to US Treasurys is theoretically reversed. Although it’s unclear if the trend will be sustained and strong enough to have far-reaching effects, the development is a market signal that investors are keeping an eye on. According to Refinitiv Eikon data, the 10-year Treasury yield in the United States was at 2.857 percent on Wednesday night, slightly lower than the Chinese 10-year government bond yield of 2.873 percent.
What Does This Mean for The Economies?
For the first time since 2010, the US yield surpassed its Chinese equivalent early last week and has been attempting to cling onto a slight premium in recent days. According to economists, the market movement reflects the two countries’ differing monetary policies. The People’s Bank of China is easing monetary policy and lowering interest rates. In contrast, the Federal Reserve of the United States is tightening policy and raising interest rates. Inflation patterns in China and the United States are also distinct, with rising producer costs in both nations but lower rises in consumer prices in China.
Investors are closely monitoring the ramifications of the Chinese yuan’s shrinking yield gap. A concern is that capital outflows may occur if the yuan drops too much. In a Chinese statement, Gao Xiang, a bond analyst at Hangzhou-based Nanhua Futures, said, “Currently, there is no hint China or the United States would adjust their monetary policy priority.” “Interest rates on both sides will continue to be quite independent,” Gao said. “The yuan exchange rate will play a significant function as a buffer in this process, as well as an important signal for the future.”