[Source-bloomberg.com]
Central Bank’s Aggressive Moves Rattle Bond Market
China’s bond market faces turbulence as it undergoes significant upheaval following a tumultuous week marked by the central bank’s heavy-handed intervention. The People’s Bank of China (PBOC) has stepped in to curb the sharp decline in bond yields, which are moving inversely to bond prices, even as the country grapples with economic challenges.
Despite these interventions, some investors remain optimistic about the future of government bonds. They point to ongoing economic struggles, deflationary pressures, and a low appetite for riskier assets as factors supporting the bond market. A bond fund manager expressed unwavering confidence, emphasizing the bleak economic outlook and the pressure to generate returns despite unprecedented measures by the government to stabilize the market.
Central Bank Actions and Market Reactions
The PBOC’s recent actions include selling large quantities of long-dated treasuries and ceasing cash provision through open market operations for the first time since 2020. These moves aim to address rising yields and stabilize the weakening yuan. Additionally, the central bank has signaled an increased involvement in treasury bond transactions and warned of potential risks in the bond market.
China’s bond market faces turbulence, with the first weekly decline in the country’s 10-year and 30-year treasury futures in a month reflecting a cautious market reaction. The PBOC’s aggressive stance has raised concerns about potential long-term instability, with some analysts advising prudence regarding long-dated bonds. The central bank’s efforts to influence the market have been compared to past strategies used in the foreign currency sector.
Investor Sentiment and Future Outlook
Despite the central bank’s interventions, some investors remain committed to the bond market, citing the limited availability of high-yielding assets. Analysts suggest that while short-term volatility may increase, the long-term trend for bonds could remain positive if economic conditions improve. The Shanghai-based fund manager noted that while the central bank’s actions might slow down bond price increases, they are unlikely to alter the overall upward trend.
Looking ahead, there is cautious optimism that yields could rise slightly if economic recovery and inflation return. However, increased government bond issuance may offset some of the expected support from monetary easing. China’s 30-year treasury yield, currently around 2.37%, could drift higher if economic conditions improve and inflationary pressures increase.
Comments