China’s government bonds extend record run driven by a safe asset shortage, rate cut hopes

China’s government bonds extended gains on expectations of rate cuts as the world’s second-largest economy seeks to reignite its sputtering growth engine while an ongoing safe-asset shortage blocked the central bank’s attempts to stem the record-setting rally and steepen the yield curve.

China’s lower-than-expected economic growth in the second quarter, coupled with a protracted crisis in the property market, has strengthened investors’ resolve to seek haven trades. The play continues to unfold even after the central bank warned that the yield on longer-dated government bonds was too low amid its efforts to cool the rally by borrowing such securities from primary dealers to bolster supply.

“The fundamentals and the policy front are both in favour of a downside in the yield, which hasn’t really changed much,” said Xiao Yu, an analyst at Zhongtai Securities. “There’s a very low chance that the bull run on the bond market will have a reversal.”

In the Politburo meeting, top policymakers made the first reference to countercyclical measures in a year, implying that more cuts in borrowing costs are on the way. They also pledged to bolster household consumption as a top priority and make all efforts to achieve the annual growth target of around 5 per cent.