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Interest rates on underwater exploration facilities

U.S. dollar strengthens with lower Chinese bond returns, as investors opt for higher returns in the U.S. economy.

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Lower Chinese bond returns fuel a surge in the US dollar, as investors opt for greater returns...
Lower Chinese bond returns fuel a surge in the US dollar, as investors opt for greater returns offered in the U.S. market.

Interest rates on underwater exploration facilities

By Kai Johannsen

In an exceptional show of economic momentum, milestones are being achieved on both international stock markets and the Chinese bond market. The Dax, a prominent European stock market, hasSoared to a dazzling new high on a recent Friday, and the Chinese bond market has followed suit.

Record-Breaking Chinese Bond Yields

In a historic turn of events, China's 10-year government bond yield, the benchmark for Chinese bonds, has plummeted to a staggering all-time low of 1.77%. Even bonds with a longer maturity, such as those maturing in 30 years, have seen a decline, with yield dropping below the 2% mark for the first time ever.

The implications of these record low yields are not only significant for the Chinese economy but also for the broader global financial landscape. This drop has created a spread of over 250 basis points between 10-year government bonds from China and their US counterparts—the widest since 1999.

Propelling Factors behind Record Low Yields

These exceptional low yields can be attributed to several key factors:

  1. Bond issuance bolstering the economy: China has launched an unprecedented amount of special treasury bonds, totaling around 3 trillion yuan ($411 billion in 2025). This stimulus measure aims to finance government spending on infrastructure projects while the increased supply of government bonds supports low yields.
  2. Ample liquidity: The People's Bank of China (PBOC) has ensured ample liquidity in the financial system, keeping the overnight repo rate near its lowest point since January, around 1.6%. This indicates that money is readily available, leading to further support for the Chinese bond market.
  3. Monetary easing prospects: The PBOC is expected to maintain liquidity and may even implement additional easing measures, such as reducing interest rates or bank reserve requirements.
  4. Investor expectations: Market participants hope that the PBOC might intervene further through outright reverse repurchase agreements or resuming bond purchases, bringing additional downward pressure on yields.
  5. Slower economic growth and moderate inflation: Relative contained inflation levels and slower economic growth in China attract investors seeking safety, further contributing to low yields as future interest rate hikes become less likely.

Together, these factors have conspired to create a perfect storm that has resulted in the benchmark 10-year yield hovering near its all-time low in early 2025.

Widening Spread between Chinese and US Government Bonds Since 1999

The vast yield gap between Chinese and US government bonds has continued to expand since 1999. Factors contributing to the growing disparity between the two countries' debt markets include:

  1. Divergent monetary policies: Despite notable fluctuations throughout the years, the Federal Reserve’s interest rates and bond yields have displayed stark contrasts compared to those in China. While the PBOC has maintained more stable, lower yields, backed by government intervention and a controlled economy, the Fed has enacted periods of both aggressive tightening and extreme easing.
  2. Economic growth and inflation differentials: The US bond yields reflect broader global economic conditions, inflation expectations, and the Fed's responses to cyclical changes. In contrast, China's lower yields reflect its slower growth, managed inflation, and controlled capital markets.
  3. Capital flow and reserve management dynamics: The management of China's foreign reserves and its holdings of US Treasuries plays a crucial role in shaping the relative yields. Periods of alleged reduction in US Treasury holdings by China have led to yield shifts, while the impact on the front-end yields in the US has varied, contributing to the expanding gap.
  4. Market perception and risk premium: Perceptions of US Treasuries as the global risk-free benchmark differ from those of Chinese government bonds, which face additional risks due to factors like capital controls and geopolitical considerations.

Collectively, these factors have driven the yield spread between Chinese and US government bonds to widen significantly since 1999, stemming from differing economic cycles, monetary policies, inflation expectations, and market dynamics.

  1. The record-breaking low yields in China's 10-year government bond, hovering near its all-time low in early 2025, have signaled a significant milestone in the Chinese economy and the global financial landscape.
  2. The decline in 30-year Chinese bond yields below the 2% mark for the first time ever, and the creation of a spread of over 250 basis points between 10-year government bonds from China and their US counterparts, marks the widest since 1999.
  3. Factors leading to these record low yields in China include bond issuance bolstering the economy, ample liquidity, monetary easing prospects, investor expectations, and slower economic growth with moderate inflation.
  4. The growing disparity between Chinese and US government bond yields since 1999 is influenced by divergent monetary policies, economic growth and inflation differentials, capital flow and reserve management dynamics, and market perception and risk premium.

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