As the U.S. 10-year Treasury yield keeps climbing, here's what it means for China

cnbc.com:

In this article

BEIJING — The U.S. 10-year Treasury yield has risen rapidly to three-year highs, erasing its gap with its Chinese counterpart, something that hasn't happened for more than a decade.

As the yields cross paths – the U.S. one rising above China's – that theoretically reverses an investment strategy that bought Chinese bonds for the greater return they offered relative to U.S. Treasurys.

It's not immediately clear whether the move is sustained and big enough to have large-scale implications, but the development is a market signal that investors are watching.

The U.S. 10-year Treasury yield traded near 2.857% as of Wednesday night, slightly below the Chinese 10-year government bond yield of 2.873%, according to Refinitiv Eikon data. The U.S. yield climbed above its Chinese counterpart early last week for the first time since 2010, and has tried to hold onto a small premium in the last few days.

The market development reflects diverging monetary policy between the two countries, analysts said.

The People's Bank of China is loosening monetary policy and cutting rates, while the U.S. Federal Reserve is tightening monetary policy and raising rates.

China and the U.S. also face different inflation dynamics, with surging producer prices in both countries, but smaller consumer price increases in China.

Investors are watching the implications of the narrowing yield gap for the Chinese yuan. A worry is that if the yuan weakens too much, that could lead to capital outflows.

«Currently, there is no sign China or the United States will shift their monetary policy focus,» Gao Xiang, bond analyst at Hangzhou-based Nanhua Futures, said in a Chinese statement translated by CNBC.

«Both sides' interest rates will continue to