A strong global bond rally, courtesy of massive central bank responses to the COVID-19 pandemic, has left government bond yield curves very low—with negative yields not uncommon. Policy rates have been slashed, quantitative easing programs launched or reignited, and an alphabet soup of unconventional measures rolled out to shore up financial markets and support fiscal rescue packages.

Chinese government bond yields, however, have bucked the trend, with 10-year bond yields climbing from their April lows of 2.4% to top 3%, putting them at pre-COVID-19 levels. Does this signal the path ahead for other global bond yields, or will the “Japanification” of global bonds drag China’s government bonds back to low-yielding territory?

To understand what might be next for Chinese government bonds, it helps to look closer at how they got to this point. We attribute the trend of rising bond yields to three factors:

1) A stabilizing economy has caused a rotation into equities. China has recovered from virus lockdowns faster than other regions and, to date, has avoided sizable second-wave infections plaguing other nations. This has enabled China’s economic activity to rebound more quickly (Display).

A largely contained virus and well-timed media coverage intimating that policymakers were greenlighting a stronger equity market combined to provide plenty of motivation for aggressive Chinese retail investors to join the flows from bonds into equities.