CGBs have extended their rally across the curve this week. The 10Y and 30Y yields have fallen to 1.70% and 2.16%, respectively, the lowest levels this year. The macro backdrop remains supportive across the curve. The latest data point to weak domestic demand. July CPI slowed to 0.5% YoY from 1.0% a month ago, reinforcing concerns over persistent disinflation. The PBOC released its Q2 Monetary Policy Implementation Report this week, reaffirming the use of counter-cyclical adjustments. The authority also expects a moderate pace of global central bank tightening, hence leaving room for further easing ahead.
RMB internationalization since the US-Iran war provides another structural anchor. Greater RMB use in trade and investment should gradually broaden foreign demand for RMB assets, thereby reinforcing appreciation forces. The CNY remains the outperformer this year. It has appreciated by 3.4% against the USD despite a 1.4% rise in the DXY YTD.
However, rich valuations at the ultra-long end are becoming concerns, and we suspect the recent flattening has gone too far. The 30Y-10Y and 30Y-5Y spreads have compressed to 46bps and 77bps, respectively, reaching this year’s support levels. This could mean that much of the term premium has already been eroded. Looking ahead, we retain a medium-term steepening bias. AI and advanced-manufacturing investment could create a more durable investment cycle, raising long-term growth and term-premium expectations.
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