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China’s central bank, the People’s Bank of China (PBOC), announced on Friday the suspension of its treasury bond purchase operations, causing yields to surge and fueling speculation that the move is an attempt to stabilize the weakening yuan.
The PBOC attributed the decision to a shortage of bonds in the market, a measure initially introduced to ease monetary settings. However, analysts believe this step aligns with a global bond market selloff and signals the central bank’s intention to keep domestic yields rising alongside international trends.
Following the announcement, yields on China’s 30-year treasury bonds rose by five basis points in early trading, while 10-year yields climbed four basis points. Both benchmarks had recently reached record lows, reflecting concerns about China’s economic outlook. The yuan also saw a slight uptick following the announcement.
The suspension marks a reversal just months after the PBOC began bond purchases as part of efforts to improve liquidity management. In a statement, the central bank clarified that it would resume bond buying “at a proper time depending on supply and demand in the government bond market.”
The decision comes amidst warnings from the PBOC about potential bubbles in a bond market characterized by record-low yields on long-term debt. This environment has drawn investors seeking safer assets amid economic uncertainty, expectations of further monetary easing, and prolonged challenges in the property sector.
Decade-Long Bond Rally Faces Pressure
China’s bond market has experienced a decade-long rally, accelerated in recent years as economic concerns and property sector struggles pushed investors into bank deposits and debt instruments. Yields on 30-year bonds recently fell to a historic low of 1.8%, reflecting bearish sentiment and a widening rate differential with the United States, which has added pressure on the yuan. The Chinese currency is at a 16-month low, having declined nearly 5% since peaking in September.
Analysts suggest the PBOC’s move aims to balance the competing pressures of declining yields and currency depreciation. Huang Xuefeng, Research Director at Shanghai Anfang Private Fund Co., anticipates the downward trend in bond yields to persist, citing a lack of attractive investment alternatives.
Yu Yangyu of Guangdong Shunde Rural Commercial Bank highlighted in a webinar that the central bank likely intervened to stabilize sentiment in the bond market amid concerns over the exchange rate and rapidly falling yields.
Meanwhile, the PBOC’s publication, Financial News, quoted an economist cautioning the market against expecting excessive monetary policy easing, signaling a more measured approach moving forward.
The suspension of bond purchases underscores the delicate balancing act faced by China’s central bank as it navigates the challenges of stabilizing its financial markets, addressing currency depreciation, and supporting a faltering economy.
