US-China Yield Gap Nears Record High Amid Fed Rate Hikes

The yield gap between US and Chinese 10-year bonds has widened to near-record levels, sparking concerns about capital outflow from China. The US Treasury yield rose to a nearly three-year high of 4.81% on September 2, while the Chinese 10-year bond yield held steady at 1.69%. This has pushed the spread between the two yields to 312 basis points, just shy of the record high of 315 basis points set in early 2023.

The contrasting monetary policies of the Federal Reserve and the People's Bank of China are driving this gap. The Fed is under pressure to raise interest rates to combat inflation, while the PBOC has kept borrowing costs low to stimulate recovery.

Analysts note that despite the widening rate gap, the real-world fallout is being cushioned by domestic market buffers. Jeffrey Zhang from Credit Agricole CIB said, 'The wide US-China interest rate gap across the curve... will continue to weigh on the attractiveness of China bonds for foreign private-sector investors.'

However, Zhang downplayed the threat of rapid capital flight, citing China's well-anchored fiscal and monetary policies. He expects reserve managers to maintain interest in Chinese government bonds for asset diversification and the growing international use of the yuan.