China 2-Year Bond Yield Drops to 1.62%, Nears 2008 Low
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
china-bondsbasis-tradeyields
Fazen Markets Editorial Desk
Collective editorial team · methodology
Trades XAUUSD 24/5 on autopilot. Verified Myfxbook performance. Free forever.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The majority of retail investor accounts lose money when trading CFDs. Vortex HFT is informational software — not investment advice. Past performance does not guarantee future results.
The yield on China’s two-year government bond fell to 1.62% on May 27, 2026, nearing its lowest level since the 2008 global financial crisis. This decline extends a months-long rally that has begun to spark skepticism among institutional investors. A growing cohort is now implementing esoteric basis trades, more common in Western markets, to bet against the persistence of these lofty valuations. Bloomberg reported this shift in market positioning as the rally shows signs of exhaustion.
The current yield of 1.62% represents a dramatic compression from the 2.35% level observed just six months ago. The last time yields traded at these depressed levels was in 2009, amidst massive stimulus measures deployed to combat the global financial crisis. The primary catalyst for the recent rally is the People's Bank of China's persistent monetary easing, aimed at stimulating a sluggish domestic economy and combating deflationary pressures. This has created a stark divergence with most major global central banks, which are either holding rates steady or still contemplating hikes.
China's macroeconomic backdrop remains challenging, with property sector woes and weak consumer demand continuing to pressure growth forecasts. The sustained influx of liquidity from the central bank has flooded the short-end of the yield curve, forcing yields downward. This environment has pushed institutional investors, who require positive real returns, to seek more creative avenues to express a bearish view on Chinese debt, leading them to complex arbitrage strategies.
The two-year Chinese government bond yield has plummeted 73 basis points year-to-date, significantly outperforming the marginal 5-basis-point decline in the ten-year bond. The yield now trades 210 basis points below the US 2-year Treasury note, which was recently quoted at 3.72%. Daily trading volume in the onshore bond market has surged past 1.2 trillion yuan ($165 billion) as volatility increases.
A basis trade involves selling the physical bond while simultaneously entering an interest rate swap to receive a fixed rate. The profit is captured if the yield in the swap market, which is more sensitive to future rate expectations, rises faster than the yield on the cash bond. The spread between the two-year bond yield and the equivalent swap rate has widened to 15 basis points from just 5 basis points a month ago, indicating rising demand for this hedge.
| Metric | Current Level | Change (1M) |
|---|---|---|
| 2Y CGB Yield | 1.62% | -22 bps |
| 2Y IRS Rate | 1.77% | -18 bps |
| Basis Spread | 15 bps | +10 bps |
This shift in strategy has direct second-order effects. Major Chinese banks, including ICBC and Bank of China, could face pressure on net interest margins if short-term rates remain suppressed, potentially impacting their profitability. Conversely, a successful bearish bet by large funds could generate significant returns, providing a boost to asset managers like China Asset Management Co. The real estate sector, highly sensitive to financing costs, may see temporary relief from lower borrowing rates, benefiting developers with strong balance sheets.
A primary risk to this bearish thesis is a further deterioration in the Chinese economy, which could force the PBOC to enact even more aggressive easing measures, perpetuating the bond rally and causing losses for those short the market. Flow data indicates that the activity is predominantly coming from offshore hedge funds and proprietary trading desks at international banks, while domestic mutual funds remain broadly long. The trade requires significant capital and sophisticated risk management, limiting its participants to large institutions.
The next key catalyst is the release of China’s official Purchasing Managers' Index data on June 1. A print significantly below 50 could reinforce dovish PBOC expectations and extend the bond rally, challenging the bearish positioning. The PBOC’s next Medium-term Lending Facility operation on June 15 will be critical for signaling near-term policy intentions.
Traders are watching the 1.60% level on the 2-year yield as critical psychological and technical support. A sustained break below could trigger a further rally toward 1.50%. On the upside, a move back above 1.75% would likely validate the bearish swap trades and could catalyze a broader unwind of long positions. The stability of the yuan against the dollar will also be a crucial factor, as significant weakness could constrain the PBOC's ability to ease further.
A basis trade is a relative value arbitrage strategy where an investor takes opposing positions in a cash bond and a derivative instrument like an interest rate swap. The goal is to profit from a widening or narrowing of the spread between the yield of the physical bond and the swap rate. It is considered a sophisticated strategy typically employed by institutional investors to express views on future interest rate movements or market dislocations.
Sustained low yields in China, the world's second-largest bond market, increase its attractiveness to foreign investors seeking yield pick-up over other developed markets, potentially driving capital inflows. However, it also highlights a major divergence in global monetary policy, which can lead to increased currency volatility. A sudden reversal in Chinese yields could trigger risk-off sentiment that spills over into other emerging market debt.
Skepticism stems from the rally being driven more by central bank liquidity injection than a fundamental improvement in economic growth prospects. Many investors believe yields are artificially suppressed and unsustainable in the long run if inflation were to re-emerge or if the government is forced to issue more debt to fund fiscal stimulus, increasing the supply of bonds and putting upward pressure on yields.
Institutional investors are using complex basis trades to bet against a Chinese government bond rally looking increasingly detached from economic fundamentals.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
Vortex HFT is our free MT4/MT5 Expert Advisor. Verified Myfxbook performance. No subscription. No fees. Trades 24/5.
Position yourself for the macro moves discussed above
Start TradingSponsored
Open a demo account in 30 seconds. No deposit required.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.