Geoff Yu at BNY notes that Chinese bonds’ resilience to rising global inflation expectations, combined with moderately strong CNY purchases this month, sets up the Chinese Yuan for rebalancing-related selling. While recent data show faster price growth, he stresses that economic headwinds and record-low front-end rates still point to sustained disinflationary pressures supportive of bonds.

Chinese bonds trigger FX rebalancing

"Surprisingly, CNY is expected to face selling as one of the few bond markets that did not react negatively to the surge in global inflation expectations."

"The most recent Chinese inflation prints have also pointed to accelerated price growth, with global supply pressures complementing a cyclical upturn."

"However, economic headwinds remain strong, otherwise the government would not be launching yet another “anti-involution” drive against over-competition announced yesterday."

"Front-end rates also fell to a record low on Monday, all of which point to sustained disinflationary pressures supportive of bonds."

"Coupled with moderately strong CNY purchases this month, CNY is expected to face rebalancing-based sales through the fixed income channel."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)