Rising stockpiles of commodities in China signal the world’s second-largest economy is in store for a cyclical slowdown, with negative repercussions for global bond yields, according to a market strategist who anticipated the country’s 2015 boom-and-bust in stocks.

“The momentum in the current recovery is about to roll over,” Hong Hao, a Hong Kong-based strategist with Bocom International Holdings Co., wrote in a note Friday. “Higher frequency data, such as disappointing car sales, retail sales growth and a weak CPI, have confirmed our model results anecdotally.”

Iron-ore inventory at China’s ports has reached an historic high, coinciding with a probable peak in the nation’s property-investment cycle, according to Hong. As economic momentum fades, bond yields “will weaken, too, as inflation pressures slowly dissipate, and the demand for safe yield in a risk-averse environment grows,” he wrote.

Hong’s take marks a sharp contrast with that of many China and global strategists arguing that both China and developed nations are in the midst of a synchronous upswing in growth that bodes well for a sustained move away from the deflationary pressures that pulled down global bond yields between 2014 and 2016. Economists expect China’s economy to maintain stronger momentum this year, upgrading their forecasts for growth in each quarter of 2017.

Some market participants see China as a key pillar behind the recovery in yields, rather than the pledges to boost infrastructure spending and reform taxes from the Trump administration.

Read more: The hidden side to the reflation trade is China’s price recovery

While there’s been some reversal in the recent climb in yields, they remain well above the lows of last year. Ten-year Treasury yields touched their highest level since 2014 this month, and at 2.43 percent in Friday trading were still distant from the 1.32 percent hit last July.

That hasn’t stopped some analysts from signaling the reflation trade’s time may have come. With risk assets taking a hit this week, Nordea Bank AB said headline inflation in the U.S. and euro area had peaked along with growth in Chinese producer prices, which surged at the fastest pace since 2008 last month.

Read more here: Reflation Trade Faces Reset as Inflation Peak Contemplated

China’s much-documented shift toward tightening — as officials try to rein in record leverage and keep pace with the Federal Reserve — is also being held up as a threat to the trade.

The country’s rapid credit expansion has helped drive the global economy, and a reduction in that stimulus as China seeks to reduce systemic risk could hit emerging-market assets by the end of the first half, Bhanu Baweja, head of emerging-market cross asset strategy at UBS Group AG, wrote in a report last month.

For Bocom’s Hong, China’s high leverage and already strongly valued assets mean there’s little bandwidth for maneuvers from policy makers.

“The reflation trade is fading soon,” he said. “As the defensive rotation unfolds in the coming weeks, volatility will return.”

— With assistance by Emma O’Brien, and Chris Anstey

Bloomberg

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