The yields on medium and long-term bonds have ended a downward trend and begun to climb in response to mounting inflationary anticipation, says a report by the Central Securities Depository Trust and Clearing Co.

The yield on the five-year inter-bank government bonds saw the sharpest increase on Tuesday, rising by 6.39 basis points to 3.78 percent, according to the report.

"The bond market is reacting to inflationary expectations ahead of the release of the July CPI figures," said Lu Wenlei, an analyst with Shenyin Wanguo Securities. "This will change investors' expectations and strengthen their confidence."

Analysts argue the CPI for July is likely to exceed five percent because of rising foodstuff prices driven by oil and fruit prices and frequent natural disasters.

As safer investments, which can avoid the volatility of stocks, bonds are preferred by investors when yields rise. However, this could hardly hurt China's stock prices because the country's bond market accounts for a small proportion of the capital market, said experts.

Bond prices would not decline drastically in the third quarter as banks, the main buyers of government securities, had sufficient funds to invest in the bond market, said Lu.

Insurance companies would continue to buy medium and long-term bonds, supporting the market together with the revenue from bonds reaching maturity, said Lu.

But possible interest rate hikes expected in September or October would suppress the rise of bond prices, he said.

Since the beginning of the year, China's bond market has been strained by the central bank's repeated rate hikes. The market even failed to gain some life from the stock market in June when stock indices nose-dived after the government raised the stamp tax from 0.1 to 0.3 percent.

Due to the bond market's late start in China, the inter-bank bond market is most active with trading of central bank bills while the corporate bond market remains relatively underdeveloped.

(Xinhua News Agency August 10, 2007)