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(Adds more details, analyst quotes)

SHANGHAI, May 11 (Reuters) –

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Chinese treasuries extended their rise on Thursday, pushing the 10-year benchmark yield below a key threshold, as downbeat inflation data and news of banks’ plans to cut deposit rates fueled bets on further monetary easing.

The yield on the benchmark 10-year government bonds fell below the psychologically important 2.7% level in early trade to 2.698%, while prices – which move inversely with yields – rose to a 15-month high.

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China’s

consumer prices

rose at the slowest pace in more than two years in April, while factory gate deflation deepened, data showed on Thursday, suggesting more stimulus may be needed to boost a patchy post-COVID economic recovery.

Bond market sentiment was also lifted by a Reuters report that state-owned banks were told to reduce the ceiling on interest rates they paid on some deposits.

“This is definitely good news to the bond market,” said Rocky Fan, economist at Guolian Securities.

“With deflationary pressure rising .. you need to lower nominal interest rates. Otherwise, demand in the economy will contract further.”

Reflecting growing expectations of a policy rate cut, China’s seven-day repo rate – an interbank market benchmark – fell to 7-week lows on Thursday to 1.7510%.

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The People’s Bank of China (PBOC) will next set its medium-term lending policy rate on Monday. The MLF rate is often seen as a signal on benchmark lending rates that are fixed around the 20th of each month.

“Amid a weakening post-COVID recovery, the PBOC’s guidance to cut deposit rates, ongoing disinflation, falling market rates and the Fed signaling a potential pause, we continue to believe a PBOC policy lending rate cut is becoming more likely,” Ting Lu, chief China economist at Nomura, wrote in a note on Thursday.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, agreed that China will likely experience a short period of consumer deflation in the coming months.

But he doesn’t expect immediate measures from the government to stimulate the economy.

“I think the policy makers will take a ‘wait and see’ stance in the next few months, to see if economic momentum can improve further without much stimulus from the government.” (Reporting by Shanghai Newsroom; Editing by Muralikumar Anantharaman and Kim Coghill)