Agencies
shanghai
Chinese government bonds fell sharply on Monday following a turbulent week in which the central bank started intervening heavily to stem a plunge in long-dated yields even as the economy is struggling.
China’s 10-year treasury futures dropped 0.6 percent in their worst day in 17 months, while the bond yields, which move inversely to prices, jumped roughly 4 basis points.
But die-hard investors say the bull market in government bonds still has legs, citing China’s wobbly economy, deflationary pressures and low investor appetite for riskier assets.
“We remain actively bullish,” said a bond fund manager, undeterred by unprecedented government moves to cool the sizzling treasury market and arrest a plunge in yields.
“We don’t see a rosy economic picture ... and we’re under peer pressure to generate returns,” said the Beijing-based manager who asked to be anonymous due to sensitivity of the topic.
Even those who have turned bearish appear half-hearted.
Treasury futures investor Wang Hongfei said he chose to be “opportunistic” in the short term, trading quickly in skirmishes as the market tussle with regulators intensifies.
China’s central bank has repeatedly warned of potentially destabilising bubble risks as investors chase government bonds and stay away from volatile stocks and a sinking property market, while banks cut deposit rates. Falling yields also complicate the People’s Bank of China’s (PBOC) efforts to stabilise the weakening yuan.
But with the PBOC now turning threats into action to tame bond bulls, authorities have opened a new battle front - following wars of attrition long fought against speculators and unwelcome price moves in the country’s stock and currency markets.
Unlike the West, “China’s financial markets, including the bond market, are subject to top-down regulation,” said Ryan Yonk, economist with the American Institute for Economic Research.
As the economy sputters, “Chinese officials will face increasing difficulty in maintaining such tightly controlled financial markets, and additional interventions are likely, and may signal the very instability Chinese officials are seeking to avoid.”
The first shot was fired last Monday, when China’s long-dated yields hit record lows amid a global rout that drove money into safe havens such as treasuries.
State banks were seen selling large amounts of 10-year and 30-year treasuries after treasury futures jumped to record highs.
Debt dumping by state banks - confirmed by data and traders - continued throughout the week, mirroring how the central bank uses big banks as agents at times to influence the yuan currency market, traders said.
Late on Friday, the central bank said it will gradually increase the purchase and sale of treasury bonds in its open market operations.
PBOC Governor Pan Gongsheng was previously head of China’s foreign currency regulator, so “it appears to be the same playbook,” said a Shanghai-based fund manager.
In another warning shot to bond buyers, the PBOC ceased providing cash through open market operations on Wednesday for the first time since 2020, contributing to the biggest weekly cash withdrawal in four months in support of yields.
Dealing a further blow to market sentiment, China’s interbank watchdog said it would investigate four rural commercial banks for suspected bond market manipulation, and would report several misbehaving financial institutions to the PBOC for penalty.
The flurry of measures have made some investors cautious.
Both China’s 10-year and 30-year treasury futures extended declines on Monday after posting their first weekly fall in a month.
