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The upward trend in CGB yields moderated yesterday, with the 10-year yield falling back to 1.71% from 1.75%. First, the market had largely priced in the extension of the 90-day truce between China and the US. Chinese goods continue to face a 30% additional tariff, and US goods remain subject to a 10% tariff. Refinement of rare earth controls is expected. However, the third-party transshipment tariffs could weigh on Chinese exports going into the second half of the year. Second, investors await concrete stimulus measures following the Politburo meeting. Policymakers are watchful over the weak aggregate demand and emphasizing the importance of anti-involution. Noticeably, the industrial utilization rate fell to a post-COVID low of 74% in 2Q25, and PPI contracted for the 33th consecutive month.
The current CGB yields offer an attractive entry point, particularly at the short-end of the curve. We expect the curve to steepen due to rate cuts and accelerating government bond issuance. The PBOC is likely to maintain a moderately accommodative monetary policy stance to revive inflation amid elevated real interest rates. The central bank injected a net RMB 288 billion in July, pushing front-end R007 and DR007 rates down to 1.5% level. The spread between these two rates has narrowed to less than 5bps, indicating ample liquidity. Credit demand remains weak, and fixed asset investment has decelerated across the board. Financial institutions continue to increase their bond holdings with their incremental liquidity.
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