Chinese bond traders fear ‘dagger to the heart' as vields vanish

A sluggish economy has pushed sovereign bond yields to record lows, with no end in sight

Chinese bond traders have few things to celebrate despite the unprecedented market rally in 2023.

A sluggish economy has pushed the nation’s sovereign bond yields to record lows, sparking anxiety across trading desks at securities firms, banks and fund managers that ever lower rates will dry up trading and cost them their jobs.

In just the past week, China’s central bank has taken two major steps to tighten its grip on short- and long-term yields, moves that may reduce opportunities to profit from market volatility even if borrowing costs do not immediately plunge further from here.

It is a landscape well-known to fixed-income professionals across the globe, which in the post-financial crisis era was mired in rock-bottom and even negative interest rates. China’s traders are now studying how their counterparts in Japan, in particular, weathered decades of minuscule yields.

“The downtrend may persist for many years, before we reach the limits of ultra-monetary easing and rates hit zero,” Asymptote Investment Research chief economist Zhu Zhenxin wrote in a report last week.

The gloomy outlook is casting a pall on the industry, already contending with increased Communist Party control, sinking salaries and a slump in dealmaking.