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China bond bulls might get support from central bank after worst week since 2013

A Chinese flag flies in front of the People’s Bank of China headquarters in Beijing, China, on Monday, Jan. 7, 2019.

Bond investors burned by the worst week for Chinese government debt in more than five years should look to the central bank for comfort, according to analysts.

Despite data showing a surprise jump in a manufacturing gauge, the People's Bank of China is likely to keep monetary policy loose, thereby supporting bonds, the argument goes. One brokerage said a reduction in banks' required reserve ratio is possible this month, while a bank pointed to inflows from foreign investors as shoring up sovereign debt.

The yield on 10-year bonds rose 19 basis points last week, the biggest increase since November 2013, in a shock to investors. Buying government debt has been a surefire way to make money in the past 14 months, with the yield falling from around 4% to 3.07% at the end of March — the lowest since December 2016.

The yield on the most actively traded 10-year bonds was little changed at 3.25% as of 4:34 p.m. China Standard Time. Futures on notes of the same tenure rose 0.14%, the first advance in six sessions.

Among the analysts:

• Citic Securities Co. in a note said the debt might be supported by a possible cut in the reserve-requirement ratio, which might happen this month as 367 billion yuan ($55 billion) of medium-term loans offered by the central bank are set to mature.

• Haitong Securities Co. analysts led by Jiang Chao in a note said bonds will fluctuate. They will be pressured by a better economic outlook but also supported by a loose monetary policy.

• Guotai Junan Securities Co. analysts led by Qin Han in a note said the room for yields to move higher will be limited. If liquidity remains loose, there is an opportunity to add long-dated bonds.

• Westpac Banking Corp.'s head of Asia macro strategy Frances Cheung said by phone that the prospect of foreign inflows following the inclusion of onshore bonds into a key index will provide support, while the absence of a trade deal and concrete signs of economic stabilization will continue to curb risk-on sentiment.