China's central bank starts trading govt bonds to influence yield curve

By Bloomberg News

China’s central bank started trading government bonds in a highly anticipated move, as a blistering rally sent benchmark yields to a record low.
 

The People’s Bank of China sold long-dated bonds and bought short-term ones, an operation that resulted in a net purchase of 100 billion yuan ($14 billion) of debt in August, according to a statement on its website. It didn’t specify the tenors or dates it bought or sold.

After starting with just verbal warnings earlier this year, the PBOC’s pushback against the bond rally has evolved into action since early August. Debt sales by state banks to drive up yields and repeated regulatory checks on some investors have kept traders on edge and dampened trading activities.

“The central bank’s efforts to correct bond market imbalances are intended to prevent long-term bond yields from rapidly falling out of a reasonable range in the short term,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. Such a move “could skew market expectations and, in turn, help contain systemic risk.”

Concerns over a slowing economy, expectations for interest-rate cuts and a lack of attractive investment alternatives have led investors to pile into Chinese government bonds this year. Officials have been seeking to limit the one-way buying, wary of the 2023 collapse of Silicon Valley Bank, which piled into US Treasuries before a market reversal.

Bets on PBOC starting to trade debt in the secondary market mounted since late Wednesday, as the central bank created a new section on its website about its “buying and selling of government bonds.” In July, it said it has “hundreds of billions” of yuan of the securities at its disposal through agreements with lenders — a sign it was ready to sell them to tame a rally. 

“This is an attempt for them to steepen the yield curve, particularly to cool the long-term bond market rally,” said Michelle Lam, Greater China economist at Societe Generale SA. “It is also interesting to note the net injection of liquidity through this new operation was offset by the net withdrawal from medium-term lending facility of about 100 billion yuan.”