(Bloomberg) -- Just a few months after China’s bond market was plagued by fears of Japanification, soaring yields are pointing to a stark shift in sentiment.

Benchmark yields hit a three-month high this week as traders unwound bets that the world’s second-largest economy is about to enter a Japan-style period of deflation and cheap money. China’s 10-year yield jumped above 1.9%, cementing a five-week widening that has erased around a third of its move lower since the start of 2024.

The bond selloff is partly the result of the People’s Bank of China’s obsessive focus on defending its currency, which has squeezed liquidity and pushed up borrowing costs in bond and repo markets. But strategists say there is also something less tangible at work — a change in the dominant narrative from one of fear to one a little more defined by hope.

“The market seems to be shifting away from the narrative of China’s Japanification,” said Larry Hu, chief China economist at Macquarie Group Ltd. He said investment tips in China were no longer tilted toward safe assets such as bonds or dividend stocks, but instead to the shares of technology companies — which have boomed this year.

The moves in China’s bond and equity markets are a mirror image of those in the US, where bond yields and stocks have fallen as investors worry about the fallout from US President Donald Trump’s disruptive trade policies.

Central Bank Win

The rise in bond yields represents a win for China’s central bank, at least for now. The PBOC repeatedly clashed with bond bulls last year, using a mix of verbal warnings, regulatory check-ups and bond sales to push back against heavy demand. A cash squeeze earlier this year finally gave it the upper hand.

China’s two-, 10- and 30-year government bond yields are now on course for their largest quarterly rises since 2020, according to Bloomberg calculations.

Yields on Chinese government bonds rose at almost every tenor on Friday, led by an almost five basis point rise in the three-year note. A record-high offering of two-year bonds saw the average yield priced at its highest level since June.

A major factor in the bond rout has been the PBOC’s decision to hold fire on rate cuts since last September, defying expectations that the central bank would be forced to lower rates to boost the economy.

Despite official guidance from Chinese politicians to adopt a “moderately loose” approach, the central bank has paused net buying of government bonds, tolerated tighter bank liquidity and stood pat on both interest rates and reserve requirements.

The job of boosting the economy has instead been left to fiscal policy, with an extra helping hand from Beijing’s newfound support for the private sector. DeepSeek’s AI progress, as well as success by Alibaba Group Holding Ltd. and other companies, has helped shift sentiment in financial markets.

To be sure, worries about deflation in China are far from over. The country’s most recent consumer price data showed the first deflationary reading for more than a year, partly the result of seasonal effects. Trump’s tariffs will put pressure on the economy, and Chinese leader Xi Jinping’s attempt to engineer a structural shift in growth drivers will be a tough ask.

China’s yield curve is also flattening, a sign that investors remain worried about the economy.

Low inflation and slower growth will both suppress bond yields, said Edmund Goh, investment director of Asia fixed income at Aberdeen Investments.

But for now, at least, the comparisons to Japan no longer ring true.

The Bank of Japan used years of ultra-loose monetary policy in an attempt to lift its economy out of a slump, ultimately embarking on one of the world’s boldest experiments with quantitative easing. China’s central bank has gone in the opposite direction — and analysts say if it continues to resist rate cuts, bond yields have further to rise.

“I don’t see any reason to think the 10-year yield couldn’t move above 2%, and it seems more likely that the unwinding of the Japanification trade will continue,” said Adam Wolfe, an emerging markets economist at Absolute Strategy Research.

--With assistance from Shulun Huang.

(Updates with Friday’s yields, auction result in paragraph eight)