US-China 10-Year Yield Gap Nears Record as Spread Widens to 312 Basis Points

The gap between US and Chinese 10-year government bond yields approached a record after Treasury yields climbed again.

Bloomberg reported on September 2 that the US 10-year Treasury yield rose as high as 4.81% during Asian trading, the highest level in about three years. China’s 10-year government bond yield held around 1.69%.

The spread between the two widened to 312 basis points, with 1 basis point equal to 0.01 percentage point. That is just 3 basis points below the roughly 315-basis-point peak reached early last year, the widest gap since Bloomberg began compiling the data in 2002.

Diverging monetary policy paths are driving the move. The Federal Reserve is under pressure to raise rates further to contain inflation, while the People’s Bank of China is keeping rates low to support the economic recovery.

A wider yield gap reduces the appeal of Chinese bonds to overseas investors because their returns are lower relative to US debt, raising the possibility of foreign capital outflows. Jeffrey Zhang, a strategist at Credit Agricole CIB, said the wide US-China rate gap and China’s relatively flat yield curve will continue to make Chinese bonds less attractive to overseas private investors, partly offsetting the effect of the yuan’s gradual appreciation.

Still, the risk of a sharp capital exodus remains limited. China maintains strict capital controls, and foreign investors make up only a small share of the country’s bond market. As of the end of July, foreign investors held just 4.6% of China’s government bond market.

The yuan has also remained relatively stable despite the widening rate gap. The dollar-yuan exchange rate traded around 6.72 yuan per dollar on September 2, keeping the Chinese currency near its strongest level since early 2023. The yuan has gained about 4% this year, the second-best performance among Asian currencies after the South Korean won.

Zhang added that reserve managers in various countries are likely to maintain demand for Chinese government bonds as they diversify assets and expand the yuan’s international use. Growth in the panda bond market, where foreign companies issue yuan-denominated debt in China, could also support overseas inflows into the country’s bond market.