Expectations of interest rate cuts drive China bonds to a multi-decade low 10-year yield.

• The 10-year yield on China bonds fell below 2% on Monday, reaching a multi-decade low.
• The Chinese government has tried to curb the surge in the bond market, driven by the influx of investments into Chinese government bonds due to the slowing economy and limited appealing investment prospects.

On Monday, China bonds performed well as the 10-year yield fell below the crucial 2% threshold, reaching a record low, due to anticipation that the government may increase its economic support.

On Monday, China's 10-year government bond yields fell to 1.9636%, marking their lowest level in 22 years, while 30-year bond yields dropped to 2.164%.

Expectations of a further cut to the reserve requirement ratio for commercial lenders and supportive liquidity conditions, as well as still weak economic fundamentals, mainly drove the bond rally, according to Tommy Xie, head of Asia macro research at OCBC Bank, in a note on Monday.

The People's Bank of China injected 800 billion yuan into the banking system in November, via a so-called "outright reverse repo operations," which was increased from the 500 billion yuan injection in October. This led to declines in yields.

The official statement stated that the move aimed to maintain a sufficient level of liquidity in the banking system.

The central bank also announced that it bought 200 billion yuan of government bonds in November to intensify its counter-cyclical adjustment of monetary policy.

The Chinese government has tried to curb the surge in the bond market, driven by the influx of investments into Chinese government bonds due to the slowing economy and limited appealing investment prospects.

Government bonds are being sought after by investors while shunning more volatile assets, according to a warning from the PBOC about the risks of destabilizing bubbles.

Edmund Goh, investment director at abrdn, stated on CNBC that the market is still anticipating fiscal stimulus support in the early months of next year.

Although there were some positive indications of revival in China's real estate market, Goh stated that there was no improvement in the country's domestic economic data in recent months. He emphasized that the decline in yields was a reflection of the current economic climate.

He stated that without any significant fiscal stimulus, China's economy will enter a deflationary state.

The Chinese yuan weakened by 0.45% on Monday to 7.2795 on the dollar.

In a November meeting, PBOC Governor Pan Gongsheng announced plans to maintain supportive monetary policy and lower the RRR by 25 to 50 basis points by year-end. Additionally, he suggested cutting the seven-day reverse repo rate by another 20 basis points before the end of the year.

Higher government bond issuance and upcoming major meetings may increase resistance to further downside on bond yields, according to Xie of OCBC.

The Politburo, the ruling Communist Party's top decision-making body, will hold a closely-watched meeting, followed by an annual central economic work conference, to set the economic plans and growth target for 2025. Both meetings are expected to take place around mid-December.

Xie stated that at these meetings, Beijing may reveal additional stimulus measures, which could change market dynamics and limit the potential for further declines in yields.

Despite Chinese yields being close to 2%, the gap between Chinese and U.S. 10-year yields has narrowed, according to Eugene Hsiao, head of China equity strategy at Macquarie Capital. This development is beneficial for Chinese equity inflows, he stated.

The 10-year yield in China is significantly lower than the over 4% yield of the U.S. 10-year Treasury yield.