Chinese bond yields rebounded strongly in recent days as investors scaled back their expectations of a near-term RRR cut. Some market expectations even shifted in a tightening direction given rising inflation concerns, while ignoring sharply weaker economic growth. We argue that Chinese rates will not meaningfully diverge from the macroeconomic trajectory in the coming months. Monetary easing steps via liquidity injections and interest rate cuts are more probable than additional RRR cuts. But there is some technical selling pressure as NBFI bond positions unwind. We expect 10-year CGB yields to return to the 2.8% range in the next few months and to trend lower in early 2022.
