Why Citi is betting on China’s 30-year bonds as US Treasury yields climb

Citi Research analysts are optimistic about China's 30-year government bonds despite rising US Treasury yields. They project a further decline in yields for China's 30-year sovereign debt, with a target of 1.8 percent, while the 10-year yield may reach 1.6 percent. This outlook is based on easing supply pressures and improved market dynamics for China's long-term bonds coming into the fourth quarter.

The recent 360-billion-yuan recapitalization plan for major financial institutions may increase demand for ultra-long bonds, particularly at the longest end, according to Rohit Garg, head of EM Asia Rates and FX Strategy at Citi. In early September, China injected 360 billion yuan into eight state-owned financial institutions, with the majority from the Ministry of Finance and the state tobacco monopoly.

The analysts believe there is room for the 10-year yield to fall towards 1.6 percent due to weak credit demand limiting upward pressure on yields. The People's Bank of China, China's central bank, is expected to continue buying bonds, providing structural demand. However, risks include regulatory constraints that could curb a rally and aggressive policy support potentially causing a back-end selloff.

Credit data from China also showed subdued activity in August, with new renminbi loans at 60 billion yuan and total social financing adding 1.66 trillion yuan, both below expectations. China reduced its US Treasury holdings to an 18-year low in July, standing at $618 billion from $633.4 billion in June. This comes as the US 10-year Treasury yield rose to 5.25 percent and the 30-year government bond yield hit 5.56 percent, the highest level since 2004.