China Steps Into Bond Market as Angst Grows About One-Way Bets
(Bloomberg) -- China’s decision to step into its government-debt market shows that officials are willing to act to curb a relentless bond rally, but it raises new questions about efforts to stimulate the world’s second-largest economy.
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The People’s Bank of China sold long-dated bonds and bought short-maturity securities in a move that resulted in a net purchase of 100 billion yuan ($14 billion) of debt in August, according to a statement on its website Friday.
The trades may help curtail aggressive gains in the nation’s bonds that have pushed benchmark yields to a record low as investors bet the central bank will ease monetary policy to support the economy. The scale and speed of the surge in bonds has prompted hand-wringing given the potential for a market meltdown if the money that has poured into Chinese debt rapidly reverses. However, market watchers said the new actions run counter to existing efforts to support sluggish domestic growth.
“It’s more about managing financial stability risks than the economy,” Win Thin, global head of markets strategy at Brown Brothers Harriman in New York, said of the PBOC’s operations. “If they want to stimulate the economy, they’d be pushing both ends of the yield curve down. Instead, it seems they are worried about a huge pile of one-way bets on bonds.”
The central bank stopped short of specifying the tenors of the debt it traded or the dates of its operations in its statement. But its actions could help push up longer-term yields relative to short-term rates, steepening the yield curve and easing the flows into fixed-income assets.
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. Yet officials have sought to ensure that such flows don’t become a crowded trade that would be vulnerable to a painful reversal.
After starting with just verbal warnings earlier this year, the PBOC’s pushback against the bond rally became more active in recent weeks. Debt sales by state banks to drive up yields and repeated regulatory checks on some investors have kept traders on edge and dampened activity.
In July, it said it had “hundreds of billions” worth of yuan of the securities at its disposal through agreements with lenders — a statement seen as a sign it was ready to sell them to tame the rally. Bets that the PBOC was preparing to trade debt then reached fever pitch this week after the central bank created a new section on its website on the buying and selling of government bonds.