China’s PPI Plunges to 22‑Month Low – What It Means for U.S. Bond Markets

May’s China Producer Price Index (PPI) dropped 3.3% year‑on‑year, marking the sharpest factory‑gate deflation in 22 monthsreddit.com+15reuters.com+15ng.investing.com+15. This decline surpassed April’s 2.7% fall, underscoring intensifying deflationary pressures amidst trade tensions, a sluggish housing market, and weak consumer demandinvesting.com+3reuters.com+3focus-economics.com+3.

1. Why This Moves U.S. Treasury Yields

China is a massive exporter of intermediate and finished goods. A steeper PPI drop can:

• Signal global deflation risk, lowering inflation expectations worldwide.

• Weaken commodity prices, which ripples into U.S. goods and services inflation.

• Generate risk‑off sentiment, leading investors toward “safe” U.S. Treasuries and pushing yields downward.

Bottom line: when China signals deflation, U.S. Treasury yields—in particular, the 10‑year—often decline.

2. Current Impact on U.S. 10‑Year Yield

With China’s PPI falling 3.3%, markets are dialing down inflation expectations. That typically:

• Dampens U.S. Treasury yield expectations.

• Raises odds for Fed to hold or ease rates, as global inflation cools.

• Drives increased demand for 10-year Treasuries, dragging yields lower.

3. Case Study: May 2025 vs. Early 2021

• May 2025: As China’s PPI hit deflationary territory, U.S. 10‑year yields dipped—reflecting lower inflation expectations and a shift toward safe assets.

• Early 2021: When PPI surged due to supply disruptions and energy costs, U.S. yields rose in response to heightened inflation concerns.

4. How to Monitor This Going Forward

If you're tracking the impact on U.S. yields:

1. Watch upcoming China PPI and CPI data releases.

2. Track U.S. 10‑year yield in real-time.

3. Observe global commodity movements—sharp drops reinforce the deflation narrative.

4. Follow Fed commentary around inflation risk, market reaction.

Conclusion

China’s 3.3% PPI drop in May 2025 is a significant deflation signal. It hints at global disinflation pressures and has already put downward pressure on U.S. 10‑year Treasury yields by dampening inflation expectations and boosting demand for safe-haven assets.

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