The spread between government bond yields in China and the United States has declined by 79 bps so far in 2018, and is likely to continue narrowing. While onshore investors are concerned the recent rise in US yields may cap any additional price gains in China’s bond market, we argue the monetary easing trend in China will be a more significant driver of prices than the declining yield gap. As a result, the yuan will likely face depreciation pressure in the second half of 2018, and China’s bond rally has further to run.
