Chinese sovereign bonds plunge on expectations of economic recovery, upbeat inflation data

The Chinese sovereign bonds plunged Monday on rising expectations that the world’s second-largest economy will recover from the slowdown, boosting GDP and inflation growth prospects in the near future. Also, Friday’s upbeat inflation data drifted investors from safe-haven buying.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose 3-1/2 basis points to 3.12 percent, the long-term 30-year bond yield climbed 1-1/2 basis points to 3.48 percent and the yield on the short-term 3-year bonds bounced nearly 4 basis points to 2.72 percent.

The State Information Centre researchers in its latest report projected that the China's 2016 GDP to rise to about 6.7 percent; consumer inflation likely to climb about 1.8 percent next year, while the producer prices are expected to increase by 1.0 percent in 2017.

On Friday, consumer prices in China rose during the month of November, remaining slightly above what markets had initially anticipated. However, the figure remained below the upper limit of the government’s target range.

China’s consumer price index (CPI) advanced 2.3 percent from a year ago, after climbing 2.1 percent in October, data released by the National Bureau of Statistics showed Friday. A median estimate of economists called for a 2.2 percent year-over-year gain. Compared to October, consumer prices rose 0.1 percent, matching forecasts. That followed a 0.1 percent decline the previous month, the data showed.

Additionally, the producer price index (PPI) soared 3.3 percent in the 12 months through November, well above forecasts calling for 2.2 percent. Producer inflation has now risen in each of the last three months after nearly five years of decline.

Markets remained focus on the Federal Reserve last monetary policy decision for 2016, which is scheduled to be released on December 14. The benchmark 10-year bond witnessed a heavy sell-off, pushing yields by 3 basis points to 2.49 percent.

The Federal Reserve is expected to increase the target range of the key interest rate by 25 basis points to 0.50 percent to 0.75 percent on December 14, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

Meanwhile, People's Bank of China sets the USD/CNY reference rate at 6.9086, weaker than Friday’s 6.8972. The China's blue-chip CSI300 index fell 2.37 percent to 3,410.99 points and the Shanghai Composite Index dipped 2.47 percent to 3,153.11 points.