Asia in Focus China Gauging the Impact of Government Bond Supply on Bond Yields

Economics Research 13 September 2026 | 1:20PM HKT

China: Gauging the Impact of Government Bond Supply on Bond Yields

n After softer growth momentum and slower-than-expected fiscal spending in H1 Xinquan Chen | 2026, government bond issuance—including both central and local government Goldman Sachs (Asia) L.L.C. bonds —is picking up, echoing the July Politburo meeting’s call to accelerate Chelsea Song fiscal spending. We expect total bond net issuance (both central and local) to rise | meaningfully in the coming months, with monthly net issuance reaching 1% of Goldman Sachs (Asia) L.L.C.

GDP per month during September–October, up from a monthly average of around 0.6% of GDP in H1. In this note, we examine whether heavier bond supply could put upward pressure on bond yields and swap rates in China. n Historical episodes suggest that higher government bond issuance has had mixed effects on 10y CGB yields, with the yield response depending on a host of factors including PBOC liquidity management, the speed of fiscal-proceeds spending, as well as shifts in growth, inflation and policy rate expectations.

n Controlling for changes in growth and inflation expectations, and changes in the interbank funding tightness relative to PBOC’s policy target, we estimate a larger sensitivity of yields at the front end of the CGB curve to net CGB issuance. By our estimates, a 0.2% of GDP acceleration in net CGB issuance is associated with a 4.8bp increase in the 1-year CGB yield, compared with 2.0bp in the 5-year CGB yield and 1.5bp in the 10-year CGB yield. These estimates suggest that higher government bond supply in China transmits mainly through front-end funding conditions rather than a larger long-end risk premium, leading to curve flattening. n 1-year CDB yields and 1-year IRS rates are similarly sensitive to net CGB issuance. By contrast, the relationship between LGB issuance and CGB yields is less clear across maturities, potentially because incremental LGB supply is absorbed partly through wider LGB-CGB spreads and because the timing of CGB and LGB issuance may be coordinated to contain liquidity pressure. n Looking ahead, faster government bond issuance—especially CGB supply—could push front-end yields higher temporarily. But with repo rates well anchored around the OMO target, domestic demand and credit conditions weak, and inflation expectations still low despite the current global energy-supply shock, a sustained CGB sell-off appears unlikely. In the longer term, we expect Chinese rates to remain on a structural downward trend, reflecting excess savings, subdued private-sector credit demand, high debt levels, and demographic

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to