China's bond market seems skeptical that recent stimulus will be enough

• China's bond traders are still piling into the safe-haven asset, despite recent stimulus efforts.
• The 30-year government bond yield hit its lowest since 2005 last week, and fell again Monday amid more measures.

While Chinese stocks have roared on Beijing's stimulus jolt, the country's bond market shows there's still lingering skepticism.

Early last week, policymakers announced a string of measures including interest-rate cuts, liquidity support, and reduced bank reserve requirements. Stocks loved it, with China's CSI 300 index soaring 16% for its best week since 2008.

But the bond market seemed less convinced by the attempted stimulus, with the 30-year government bond yield falling the next day to a level close to its lowest since 2005. In theory, if fixed-income investors had been placated, they would've left behind the relative safety of bonds, pushing yields higher. Instead the opposite happened.

The same dynamic played out on Monday, following more pointed efforts from China to address a flagging property market. Three of the nation's largest cities loosened rules for homebuyers, while the People's Bank of China also moved to lower mortgage rates.

The moves sent stock soaring once again, with the CSI 300 climbing 8.5% for its best day since 2008. And once again, bond yields on 30-year government debt slipped 8 basis points to 2.36%. While that's above the multi-year low of 2.14% seen last week, it's still a surprising directional move.

Investors may be reacting to the widely held view that — despite the size and scope of China's stimulus moves — they still might not be enough. The country is plagued by deflation, low consumption, and a real-estate debt crisis. While added liquidity may bolster confidence in the equity market, analysts say it does little to repair core issues. Instead, China should spend more on its consumers.

"Net supply of government bonds went up significantly in August to CNY1.85tn, driven by larger issuances from both the central and local governments," Bank of America wrote in mid-September. "Until we see a meaningful step-up in fiscal stimulus to stabilize consumption and the property market, the downward trend of rates is unlikely to reverse."

Supportive measures could either include an upward revision to China's fiscal deficit target or the issuance of special refinancing bonds by local governments, it said.