SHANGHAI, Oct 31 (Reuters) - Foreign investors quickened the pace at which they cut holdings of Chinese bonds in September, leading to the eighth consecutive month of outflows - and the longest streak of outflows on record - weighed by a weakening yuan and U.S. monetary tightening.
Foreign holdings of yuan-denominated bonds traded on China's interbank market stood at 3.4 trillion yuan ($468.08 billion) at September-end, versus 3.48 trillion yuan a month earlier, the central bank's Shanghai head office said late last week.
Such holdings fell 30 billion yuan on month in August.
Overseas institutional investors sold 61.6 yuan worth of interbank bonds last month, compared with 27.8 billion yuan in August, showed data from China Central Depository & Clearing Co.
"We do not expect any meaningful comeback of inflows yet, on compressed yield differentials, a subdued RMB (yuan) sentiment, and probably expectations for further increases in UST (U.S. Treasury) yields to be much less rapid than earlier in the cycle," said rates strategist Frances Cheung at OCBC Bank.
The yield gap between China's benchmark 10-year government bonds and their U.S. counterparts reached the widest in 15 years in September when the yuan , faced with intensifying depreciation pressure, hit lows last seen in global financial crisis of 2008.
"The unfavourable interest rate spreads between China and the U.S. remain and the broad USD continues to strengthen," analysts at Goldman Sachs said in a client note.
"We expect CNY to depreciate further in the next few months and our 3-month forecast for USD/CNY is 7.4."
Some traders and analysts also pointed to domestic economic slowdown as among factors weighing on bond flows. China's economy rebounded in the third quarter at a pace faster than market watchers had expected, but a more robust revival in the longer term will likely be challenged by persistent COVID-19 curbs, a prolonged property slump and global recession risk.
Elsewhere in the region, foreigners turned net sellers of Asia ex-China bonds in September as concern mounted over a weaker growth outlook, slowing exports and U.S. tightening. ($1 = 7.2637 Chinese yuan) (Reporting by Winni Zhou and Brenda Goh; Editing by Christopher Cushing)
