(Sept 10): The yield gap between Chinese and US 10-year sovereign bonds widened to the most on record following a drop in Treasuries, underscoring the stark divergence between a global debt sell-off and the stability of onshore yields. 

The benchmark 10-year US Treasury yield climbed to 4.85% on Wednesday, the highest since 2023, while its similar-maturity Chinese counterpart held steady at 1.68%. That drove the yield gap between the two to an all-time high of 317 basis points, according to data compiled by Bloomberg dating back to 2002. China’s yield disadvantage extends beyond US debt, with Japanese and UK yields sitting near multi-decade highs.

The record spread reflects a sharp monetary policy divide: the Federal Reserve is expected to raise interest rates to fight inflation, while the People’s Bank of China keeps its policy loose to support growth. Onshore banks have also piled into government bonds amid a dearth of attractive investment options and sluggish loan demand, helping anchor yields.

“The widening yield gap reflects increasingly divergent macro and policy cycles,” said Wee Khoon Chong, senior market strategist for Asia Pacific at BNY in Hong Kong. “US Treasury yields have risen as markets shifted from expecting rate cuts to pricing further tightening. By contrast, Chinese government bond yields have continued to decline amid weak domestic demand, lingering disinflation and greater demand for defensive assets.”

Crucially, the depressed onshore yields have done little to dampen the yuan’s resilience, with the currency having climbed over 4% against the dollar this year to outperform all but one of its Asian peers. The gains have been underpinned by China’s resilience to energy supply shocks, its strong exports and the central bank’s tolerance for a stronger currency.

The yuan was little changed at 6.7075 per dollar in onshore trading on Thursday, near its strongest level since 2023. The yield on China’s 10-year government bond is hovering around the lowest level in more than a year.

Beyond trade flows, China’s strict capital controls limit disorderly outflows, while low foreign exposure in local debt also helps cushion the market. Foreign funds’ holdings of Chinese government bonds accounted for just 4.6% of the total market as of end-July, according to Bloomberg calculations based on data from China Central Depository and Clearing Co.

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