Chinese sovereign bonds slump as manufacturing PMI hits 2-year high

The Chinese sovereign bonds plunged Tuesday after recent data showed that the world’s second largest economy’s manufacturing activity expanded at a faster pace in October.

The yield on the benchmark 10-year bonds, which moves inversely to its price, rose more than 1 basis point to 2.756 percent, the 20-year bond yield climbed 3 basis points to 3.081 percent and the yield on the short-term 2-year bonds gained nearly 3 basis points to 2.385 percent.

The Caixin China manufacturing purchasing managers’ index (PMI) rose to 51.2 in October, analysts were expecting a slight increase to 50.2 from a reading of 50.1 the previous month. Anything above 50 is associated with expansion. Also, China’s official non-manufacturing PMI rose to 54 in October from 53.7 in September.

China’s bonds strengthened in October, which dragged 10-year yields to a decade low on worries over the country’s property market restrictions and reduced leverage in the financial system, which is poised to weigh on its economic growth.

PBOC's chief economist said that China will grow around 6.7 percent in 2016 and monetary policy is now appropriate. Said will look at changes in the macro-economy and financial sector in the future and Yuan remains stable vs currency basket on Oct, despite falling against the dollar, this underlines commitment to new currency regime. Said impact on yuan to be limited if Fed raises rates in December and monetary policy will consider the possible impact on the property market.

China’s Q3 GDP growth stayed at 6.7 percent y/y, trended in line with the consensus, but in q/q terms, GDP growth nudged down to 1.8 percent q/q seasonal adjusted in the third quarter of 2016, from 1.9 percent q/q in previous quarter with growth in the secondary sector stayed at 6.1 percent y/y, while growth in the tertiary sector edged up to 7.6 percent y/y, from 7.5 percent y/y in the second quarter of 2016.

Meanwhile, People's Bank of China sets the USD/CNY reference rate at 6.7734, 0.06 percent stronger than 6.7641 yesterday and injects 100 billion yuan through 7-day reverse repos, 60 billion yuan through 14-day reverse repos and 30 billion yuan through 28-day reverse repos.

The China's blue-chip CSI300 index rose 0.62 percent to 3,357.12 points at the end of the morning session and the Shanghai Composite Index climbed 0.62 percent to 3,119.79 points.