China’s sovereign bond yields spiked to their highest levels this year on Monday as investor sentiment shifted, reflecting growing optimism about the country’s economic growth prospects and a move away from expectations for immediate interest rate cuts. The rise in bond yields coincided with a notable rally in Chinese offshore stocks, signaling a shift of liquidity toward riskier assets.
Bond Yields Hit Three-Month Highs
Yields on China’s 10-year government bonds surged over 10 basis points, reaching 1.865%—the highest they have been in 2025. This marks a significant climb from January’s record lows. In addition, yields on China’s 30-year sovereign bonds surpassed the critical 2% threshold, hitting 2.030%, while yields on the one-year note gained 10 basis points, reaching 1.643%.
The spike in yields is attributed to two main factors: investor optimism about the government’s pro-growth policies and an increased supply of government bonds. The selloff in China’s bonds follows recent government actions, including an ambitious growth target of 5% for the year, signaling renewed fiscal stimulus to support economic recovery.
Shifting Market Sentiment
Frederic Neumann, HSBC’s Chief Asia Economist, attributed the bond selloff to a growing sense of optimism about China’s economic growth. “Growth optimism has returned in China,” he said, referencing the National People’s Congress’s pro-growth agenda. The government’s focus on fiscal easing, including increased government spending and additional bond issuance, has driven market expectations for a stronger recovery.
As part of its fiscal stimulus efforts, China raised its budget deficit target to 4% of GDP—the highest level since at least 2010—and announced plans to issue 1.3 trillion yuan ($178.9 billion) in long-term special treasury bonds in 2025. An uptick in bond issuances tends to make existing bonds less attractive, thereby pushing prices down and boosting yields.
The possibility of further increases in government bond issuance is also being speculated upon, especially if trade tensions between China and the U.S. escalate. Ju Wang, head of Greater China FX and rates strategy at BNP Paribas, noted that increased issuance and the government’s focus on stimulating the property market and consumption could push long-end rates even higher.
Delaying Interest Rate Cuts
A key factor influencing the rise in bond yields has been a shift in investor expectations regarding interest rate cuts. The People’s Bank of China (PBOC) has not acted on hints of easing since late last year, and on Thursday, central bank Governor Pan Gongsheng reiterated that the PBOC’s priority is stabilizing the yuan, particularly amid rising trade tensions with the U.S. While the central bank has suggested it might lower rates or reduce the amount of reserves banks must hold, it has emphasized that these measures will only come “at an appropriate time.”
The PBOC’s approach to currency stability is seen as a delicate balancing act, with economists suggesting that avoiding a rapid depreciation of the yuan is important in maintaining favorable conditions for trade talks with the U.S. As the Chinese offshore yuan weakened slightly by 0.24% on Monday, trading at 7.2588 against the U.S. dollar, the market continues to closely monitor the central bank’s policy stance.
Shifting Investor Sentiment: From Bonds to Equities
Another factor contributing to the rise in bond yields is a shift in investor sentiment from bonds to equities. The Chinese offshore stock market has been on a strong upward trajectory, boosted by investor enthusiasm for tech stocks, particularly AI-related companies like DeepSeek. As global investors bet on China’s advancements in artificial intelligence and its potential economic benefits, the MSCI China index has surged nearly 20% this year, with the Hong Kong-listed Hang Seng Index outperforming global indices, up more than 18%.
Carlos Casanova, Senior Economist for Asia at UBP, explained that the rally in Chinese equities, driven by the re-rating of offshore stocks, has led to a pivot away from government bonds. “Investor sentiment has become more bullish following the re-rating in offshore equities triggered by DeepSeek, leading to a shift in favor of equities over government bonds,” he said.
Outlook: Growth vs. Currency Stability
Looking ahead, Neumann believes the bond selloff could “quickly run out of steam,” as the PBOC remains committed to a monetary policy that favors growth over currency stabilization. With the central bank likely to tilt its stance toward easing, bond yields may stabilize in the near term.
Nevertheless, the shift in market dynamics highlights the complexities facing China’s economy, with fiscal stimulus and fiscal policy playing a pivotal role in shaping investor expectations. While bond yields are rising in response to optimism about growth and fiscal policies, it remains to be seen how the PBOC’s actions, alongside the evolving U.S.-China trade situation, will influence the trajectory of both the yuan and China’s bond markets.
As China’s economic landscape continues to evolve, both bond and equity investors are adjusting their strategies accordingly, navigating an environment marked by fiscal policy shifts, shifting expectations for interest rates, and the growing allure of riskier assets.
