BEIJING — The U.S. 10-year Treasury yield rose rapidly to three-year highs, erasing its gap with its Chinese counterpart, something that hadn’t happened in more than a decade.
When yields intersect – with the US overtaking China – it theoretically reverses an investment strategy that bought Chinese bonds for the superior yield they offered relative to US Treasuries.
It’s not immediately clear if the move is sustained and large enough to have large-scale implications, but the development is a market signal that investors are watching.
The 10-year U.S. Treasury yield was trading near 2.857% late Wednesday, slightly below the 10-year Chinese government bond yield of 2.873%, according to data from Refinitiv Eikon. The US yield surpassed its Chinese counterpart early last week for the first time since 2010, and has tried to maintain a small premium in recent days.
Market developments reflect diverging monetary policies between the two countries, analysts said.
The People’s Bank of China is easing monetary policy and cutting rates, while the US Federal Reserve is tightening monetary policy and raising rates.
China and the United States also face different inflation dynamics, with soaring producer prices in both countries, but weaker consumer price increases in China.
The Chinese yuan in the spotlight
Investors are watching the implications of the narrowing yield spread for the Chinese yuan. One concern is that if the yuan weakens too much, it could lead to capital outflows.
“Currently, there is no indication that either China or the United States will change its monetary policy stance,” Gao Xiang, a bond analyst at Hangzhou-based Nanhua Futures, said in a Chinese statement translated by CNBC.
“Both sides’ interest rates will continue to show relative independence,” Gao said. “In this process, the yuan exchange rate will play an important role as a buffer, and will also be an important indicator for the future.”
In recent months, the yuan has traded near its highest level in three years against the US dollar and has weakened slightly in recent weeks. The onshore yuan was trading near 6.37 against the greenback on Tuesday afternoon, down 0.38% for the year so far.
But right now, China’s high trade surplus is more than offsetting the impact of the narrowing yield spread on the yuan, Larry Hu, chief China economist at Macquarie, said in an e-mail. mail.
The Chinese yuan will face greater depreciation pressure due to a decline in China’s trade surplus, Hu said. For him, the convergence of US and Chinese 10-year yields is not so bad since the gap has been narrowing for more than a year.
A country has a trade surplus if its exports exceed its imports. China recorded a trade surplus of $47.38 billion in March, down sharply from $115.95 billion between January and February.