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China Bond Yields Climb as Government Signals Policy Shift

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This article was originally published on ETFTrends.com.

The yield on the benchmark 10-year Chinese government bonds ended 2.9 basis points higher at 3.562 percent as Beijing vowed that it would pursue a more "vigorous" fiscal policy in order to stimulate growth as expectations of looser conditions begin to rise. The change in policy comes as fears that the trade wars between China and the United States could heighten, dealing a blow to the current economic landscape.

“The government is sending a clear signal that it is preparing to defend growth, ... Premier Li may be concerned about the negative impact of deleveraging on growth,” ANZ economists Raymond Yeung and Betty Wang said in a note.

Related: US-China Tariffs Weigh On Commodities

The uptick in 10-year Chinese bond yields are a welcome sight to China fixed-income investors who have been seeing a persistent decline in yields--as such, a rise in bond prices. Since the beginning of the year, the 10-year yield has shed more than 50 basis points.

China’s central bank, the People's Bank of China, extended a loan of 502 billion yuan ($74.36 billion) to financial institutions via its one-year medium-term lending facility (MLF) in an effort to help stimulate growth. In addition, China also hinted at plans to issue 1.4 trillion yuan in special bonds by local governments to underwrite investment in infrastructure--a move that would depress bond prices as a result of increased supply.

In addition, China's central bank in July released 700 billion yuan in liquidity by scaling back the reserve requirements of certain banks. Economists have not ruled out that further reserve requirement reductions could occur this year to help stimulate economic growth.

As investors sold off Chinese bonds, the country's stock markets edged higher on the prospect that policy easing will take place. The Shanghai Composite index .SSEC and the blue-chip CSI300 index .CSI300 both closed up 1.6 percent.

High-Yield Fixed-Income ETFs Rise

Meanwhile in the U.S., as investors brace themselves for more interest rate hikes this year, they've pulled out of the yuan in addition to other global currencies. The spread between 10-year Chinese and U.S. Treasuries narrowed to 19-month lows on Thursday.

Meanwhile, high-yield fixed income ETFs got a boost--ProShares High Yield— iShares Interest Rate Hdg Hi Yld Bd ETF (HYGH) was up 0.15%, SPDR Blmbg BarclaysST HY Bd ETF (JNK) was up 0.13% and iShares iBoxx $ High Yield Corp Bd ETF (HYG) was up 0.23%.

Related: Are China ETFs Oversold?

For more trends in the fixed income space, visit the Fixed Income Channel

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