China’s two-year yields fall below 1.00% Per Reuters

Written by Jamie McGeever

(Reuters) – Looking ahead to the day ahead in Asian markets.

The first full trading week of 2025 begins in Asia on Monday with a sharp slide in Chinese currency and bond yields, a worsening and volatile political situation in South Korea and a closed US-Japanese trade meeting all seeking investor attention.

Most of the reports of the consumer purchasing managers are still on the floor, giving investors a first look at how many of the largest economies in Asia, including China, are closed by 2024.

The world market situation looks bright after Friday’s Wall Street, and the uncertainty of the equity and bond market seems to be there.

But emerging market funds and commodities are on the defensive, thanks to higher US Treasury yields and a rising dollar. The greenback eased a bit on Friday, but hit a two-year high the day before and is up nearly 10% over the past three months.

Much of the dollar’s appeal has come from a rise in old US Treasury yields since the Fed began cutting interest rates in September. The central bank’s 100 basis points were reached by an increase of 100 bps over the 10-year period, a surprising change that caught many investors – and possibly policy makers – off guard.

The picture in China could not be more different. As investors brace for a year of policy tightening and monetary easing from Beijing, yuan and bond yields are coming under intense downward pressure.

Attention is focused on the short end of China’s bond yields, with the two-year yield poised to break below 1.00%. It is already the lowest on record, having fallen 50 bps in the past two months and 100 bps since last March. The 1.00% psychological barrier could be broken on Monday.

In this regard, China’s inflation data later this week will be even more important, with a Reuters poll suggesting that annual consumer price inflation in December was stable to 0.2%. Although China’s economic shock index has been rising in recent weeks, markets will be more sensitive to further deflationary pressure.

The yuan on Friday fell to a four-month low, breaking through the 7.30 level per dollar that the People’s Bank of China appeared to be protecting. A move to 7.35 per dollar would indicate a 17-year low.

Selling pressure on the yuan looks very strong, as evidenced by the spread between the dollar/yuan rate and the central bank’s daily adjustment. It is now the biggest since last July, hovering around its widest level on record.

Are Beijing officials scared? The central bank on Friday warned fund managers against cutting bond yields further, amid concerns that a bond bubble could derail Beijing’s efforts to stimulate growth and control the yuan.

Here are some key factors that could guide the markets on Monday:

– China, Japan, India, Australia service PMIs (December)

– Inflation in Thailand (December)

– GDP of Vietnam (Q4)