The yield difference between China's 10-year government bonds and their US equivalents is approaching a record high, largely due to the intensifying selloff in US Treasuries. This widening gap increases the appeal of US assets for investors, potentially accelerating capital outflows from China, a country already grappling with economic challenges and a weakening currency. The 10-year US Treasury yield surged to 4.79% on Tuesday, its highest since January 2025, while the 30-year US Treasury yield hit 5.28%, nearing levels last seen before a brief intervention by the Treasury Department in August.
The global bond selloff is not confined to the US. Sovereign debt yields are rising across major economies, including Japan, where the 10-year yield reached 3%, its highest since October 1996. This broader trend is fueled by concerns over persistently high inflation, rising government debt, and expectations of further interest rate hikes by central banks. The surge in oil prices is also reviving inflation fears, prompting investors to demand higher returns for holding government bonds.
The widening yield differential puts pressure on the Chinese yuan and raises the cost of borrowing for Chinese entities. As US yields become more attractive, investors may shift capital out of China, further exacerbating the yuan's depreciation. This situation complicates China's efforts to stimulate its economy and manage its own debt levels, as it risks a cycle of capital flight and currency weakness. The escalating global bond yields also impact corporate investment, household borrowing, and government finances worldwide, leading to higher mortgage rates and potentially weighing on stock markets, as seen by the Dow Jones Industrial Average falling 0.79% and the S&P 500 down 0.71%.
