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, projecting yields to drop further while US Treasury yields rise. In a research note, they recommend long positions in China's 30-year sovereign debt, expecting the yield to fall towards 1.8% and the 10-year yield near 1.6%. This outlook is based on easing supply pressures and improved market dynamics for China's long-term bonds heading into the fourth quarter.

A recent 360-billion-yuan recapitalisation plan for major financial institutions could increase demand for ultra-long duration bonds, particularly at the longer end, according to Rohit Garg, Citi's head of EM Asia Rates and FX Strategy. On Tuesday, China's 30-year special treasury bond yield hit a low of 2.11%, while the 10-year bond traded at 1.68%, close to a one-year low.

In early September, Beijing injected 360 billion yuan into eight state-owned financial institutions, with 300 billion yuan from the Ministry of Finance and 60 billion from the state tobacco monopoly. Analysts predict room for the 10-year yield to decrease to around 1.6%, citing weak credit demand that limits upward pressure on yields.

The People's Bank of China's continued bond purchases will provide additional structural demand. China has issued 90% of its planned 1.3 trillion yuan in ultra-long special treasury bonds by mid-September, with the remaining allocation expected in October. However, risks remain, such as stricter regulations limiting a rally and aggressive policy support potentially causing large back-end sell-offs.

August's credit data showed subdued credit activity, with new renminbi loans at 60 billion yuan and total social financing adding 1.66 trillion yuan, both missing expectations. China reduced its US Treasury holdings to a 18-year low of $618 billion in July, dropping from $633.4 billion in June, according to US Treasury data. Foreign holdings also fell for a second straight month due to concerns over the sustainability of American government debt.

The US 10-year Treasury yield reached 5.25% on Tuesday, while the 30-year government bond yield hit 5.56%, the highest level since 2004.