Chinese sovereign bonds rally as lower inflation boosts hopes of easing

The Chinese sovereign bonds rallied Tuesday after data showed that the country’s both consumer and producer inflation continued to remain weak, creating pressure on the PBOC for a further innovative monetary policy easing.

The yield on the benchmark 10-year note, which moves inversely to its price, dipped nearly 1 basis point to 2.762 percent, the yield on super-long 30-year bond fell nearly 3 basis points to 3.327 percent and the yield on short-term 3-year note slid 1 basis point to 2.407 percent by 05:00 GMT.

China's CPI inflation eased to 1.8 percent y/y in July, the consensus was for 1.8 percent y/y, as compared to 1.9 percent y/y in June as food inflation moderated to 3.3 percent y/y in July from 4.6 percent y/y in June. This print lost the momentum for third straight month, putting it further below the government target of 3 percent for the year.

Similarly, China's PPI declined for a 53rd consecutive month by 1.7 percent y/y in July, against market consensus of -3.2 percent y/y, after -2.6 percent y/y reading seen in June.

On Monday, China’s exports fell again in July while a decline in imports accelerated in a possible sign of weakness in the world’s second-largest economy. Imports tumbled 12.5 percent y/y in July in USD terms after falling 8.4 percent y/y in June, against market expectation of -12.5 percent y/y.

Similarly, exports declined 4.4 percent y/y in USD terms after dipping 4.8 percent y/y in June, the consensus was for -3.5 percent y/y. China's trade balance widened to 52.31 billion US dollar in July from 48.11 billion US dollar in June, the consensus was for 47.3 billion US dollar.

Meanwhile, China sets the USD/CNY reference rate at 6.6594, 0.03 percent stronger than 6.6615 yesterday. The Shanghai Composite (SSEC) rose 0.29 percent to 3,012.89.