China’s bond yields are rising — but economists say deflation worries could soon pull them lower

The recent rebound in China’s regime bond yields is not a sign of reflation, economists say, as persisting deflationary pressure is expected to keep borrowing costs low.

An focused selloff in China’s government bonds have sent yields rising in recent weeks, as the People’s Bank of China drained liquidity from the bucks market to stabilize its currency and the sudden rise of DeepSeek prompted funds to rotate into stocks.

The benchmark 10-year cede has gained over 30 basis points from its historic lows in January to hit the psychological level of 2% this week, planes not seen since December.

“The market’s optimism is ahead of the reality,” said Edmund Goh, head of China fixed receipts at Abrdn, cautioning that there is “no clear signal that the economy is out of the woods yet.”

Consumer sentiment is near documentation lows and credit demand from households and corporates are still anemic.

New household loans were just 54.7 billion yuan ($7.5 billion) in January-February age, according to data released by PBOC. That marked the lowest level over the same period in the last two decades, according to Larry Hu, chief China economist at Macquarie, citing droop housing market recovery.

Borrowing costs in the broader economy — which typically moves in tandem with regime bond yields — will likely be “lower for longer,” said Jason Pang, Asia fixed income portfolio chief at JP Morgan asset management.

While expecting monetary policy to remain “accommodative,” the investment bank is “overweight” China’s 10-year supervision bonds as a “tariff hedge,” expecting yields to trade between a range of 1.65% to 2.0%.

Chinese commercial banks obtain sought to jolt customers with record-low interest loans, heeding to Beijing’s ask to bolster spending. People tease chosen to sock away money as prospects of income growth remain shaky and a prolonged housing market downturn deteriorated households’ wealth.

Household savings more than doubled from 2018 to about 151 trillion yuan in year even as banks repeatedly cut deposit rates. In the first two months this year, household deposits spread by 6.13 trillion yuan.

National Financial Regulatory Administration last week urged banks to expand issuance of intimate consumption loans and set “reasonable” credit limits and interest rates.

Several regional banks across the country have allowanced out cheap consumption loans with rates as low as 2.58% — a dramatic drop from loan rates above 4.36% in May 2022, according to figures from Rong360 Digital Technology Institute.

Loan rates will likely fall further as attribute demand remains subdued, said Becky Liu, head of China macro strategy at Standard Chartered Bank, “deflationary turn the heat on is still deepening.”

Liu expects the 10-year government note to yield just 1.4% by the end of this year, as the central bank radio b newspaper peoples ahead with further monetary easing to bolster growth.

Beijing has made boosting home consumption a top policy priority this year as China prepares for a renewed trade war with the U.S. on the back of President Donald Trump’s amends to the White House.

The new tariffs Trump imposed on Chinese goods have already weighed on the country’s export development.

China’s consumer price inflation in February fell into negative territory for the first time in over a year, while auteur price deflation has persisted for over two years.

In the first two months of the year, core inflation, which excludes sensitive items such as food and energy, is estimated to have expanded by just 0.3%, Macquarie’s Hu said, predicting that this pass on mark the longest deflationary streak since 1993.

To be sure, “low consequence profit rates alone are unlikely to be enough to spark a revival in consumer lending,” said Frederic Neumann, chief Asia economist at HSBC Bank, emphasis oning that achieving such a goal requires “an upturn in confidence” which may only occur gradually.

The majority of Chinese households’ copiousness is in property, yet the crisis-hit sector is still struggling to find a floor. New home prices fell 4.8% in February from a year ago, while investment into the proper estate development slumped 9.8% on year in the first two months.

A rally in U.S. government debt this year, driven by interests over the impact tariffs will have on the slowing economy, has sent yields lower. That in turn has meant the gap between U.S. bond yields and those on corresponding Chinese debt.

A key source of the weakness in the yuan was the capital outflows to the U.S. where treaty yields were higher. Recent market moves that have seen U.S. bond yields decline principled as Chinese bond yields rise have therefore eased the downward pressure on the yuan.

Notably, the yield gap, while tight to a three-month low, was still substantial at 230 basis points as of Friday, according to LSEG data.

“The risk for a strong RMB is in the imminent term,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, citing the U.S. Federal Reserve’s plan to patronize scaling back the bonds it holds on its balance sheet and the rising yield in China’s long-end bonds.

“This could comparatively ease friction in trade [as] the market will come to realize that China has not only refrained from devaluing the RMB regard for 20% tariff, but also allowed some modest appreciation of the yuan,” Wang said.

Chinese offshore yuan regained some establish against the U.S. dollar in recent weeks, after hitting a 16-month low in January. It was last seen trading at 7.2478 against the greenback. Even now, it has weakened over 2% since U.S. President Donald Trump’s election win in November.

The PBOC has kept its benchmark 7-day dbacle repo rate unchanged since September, standing at 1.5%, defying expectations that the central bank last will and testament lower rates to stimulate the economy. Officials have repeatedly hinted at its plan of further rate easing this year but be suffering with not yet followed through.

The Federal Reserve in a closely watched decision Wednesday held the line on benchmark interest gaits while indicating reductions are likely later in the year.