US-China bond yield gap nears all-time record

The yield spread between US and Chinese 10-year government bonds widened to 312 basis points on Wednesday, approaching the all-time record of roughly 315 basis points set in early 2025, as diverging economic conditions drive the two largest economies in opposite directions.

The benchmark 10-year US Treasury yield climbed as high as 4.81% in Asian trading on Wednesday, its highest level in nearly three years, according to Bloomberg. China's 10-year government bond yield held steady at 1.69%, keeping it below the 1.7% threshold it recently breached for the first time.mezha+1

A Tale of Two Economies

The widening gap reflects starkly different monetary and economic trajectories. In the United States, a global bond sell-off driven by rising oil prices and persistent inflation has pushed yields sharply higher. Market participants now estimate a 65% probability that the Federal Reserve will raise interest rates in September, up from roughly 40% in late August, according to Forbes. The two-year Treasury yield has climbed to 4.35%, up from about 3.5% at the start of the year.forbes

China, meanwhile, continues to fight deflation stemming from its prolonged real estate crisis. The People's Bank of China has kept borrowing costs low to support an ailing economy. As Reuters columnist Jamie McGeever noted, the situation is "particularly notable given that for more than a decade — from 2010 to 2022 — the yield on Chinese government bonds was higher than that on US Treasuries".reuters

Why Chinese Yields Keep Falling

Barclays ↘ 2.72% analysts have questioned how a borrower facing a deteriorating government balance sheet, collapsed real estate market, and mounting off-balance-sheet liabilities can raise funds at just 1.7%. The answer lies largely in China's domestic savings glut. The country's gross domestic savings rate stands at about 43% of GDP — more than twice the US level — and strict capital controls limit where that money can go.mezha+1

With real estate no longer seen as a reliable store of value and the CSI 300 still roughly 20% below its 2021 peak, households continue buying government bonds despite meager yields. HSBC ↘ 1.32% analysts forecast China's 10-year yield could fall to 1.5% later this year, which would push the spread with US Treasuries even wider.mezha

Risks on the Horizon

The record-approaching gap raises the risk of capital outflows from China, though analysts note that low foreign ownership of Chinese bonds and Beijing's capital controls provide a buffer. Still, as Reuters reported, the decline in Chinese yields "should not be viewed as evidence of the country's financial or economic health" but rather reflects "an excess of funds within China, limited investment options, and a lack of attractive places to invest them".bloomberg+1