China’s central bank started trading government bonds after months of speculation it would enter markets, pushing back against a blistering debt rally that sent benchmark yields to a record low.
The People’s Bank of China sold long-dated bonds and bought short-end ones, operations that resulted in a net purchase of 100 billion yuan ($14 billion) of the debt in August, according to a statement on its website. Such moves may help push up longer-term yields relative to short-term rates, steepening the yield curve.
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The central bank stopped short of specifying the tenors of the bonds it traded or the dates of its operations.
Authorities have been torn for months: While the economy is primed for lower borrowing costs to help boost demand, it may not be able to handle the wild market swings that the bursting of a liquidity-fueled bubble could create. In an article this week, a PBOC-backed newspaper said crowded holdings in debt positions could turn into a “stampede” in the event of a sharp yield reversal that can threaten financial stability.
The operation is also the clearest sign so far that the PBOC is making government-bond trading a regular tool to manage liquidity, which was suggestion from President Xi Jinping in a book on his remarks published in March. This would give the central bank more flexibility to ensure ample cash supply, as the room for using traditional tools such as adjustments of the reserve-requirement ratio is shrinking.
“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.
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.
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. Bets on PBOC starting to trade debt mounted since late Wednesday, as the central bank created a new section on its website about its “buying and selling of government bonds.”
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Unlike peers such as the Federal Reserve or Reserve Bank of Australia which accumulated sizable amounts of debt before subsequently reducing their balance sheets, the PBOC has only bought a few batches of special sovereign bonds in rollover trades a few times in the past decade.
PBOC Governor Pan Gongsheng and his predecessor Yi Gang have both spoken about their desire to maintain a “normal, upward sloping” yield curve in public speeches in recent years. This provides incentives for the market to invest, Pan said in June.
Also, trading of government bonds has the potential to become a key monetary tool for the PBOC.
By buying sovereign notes on a net basis, the PBOC effectively injected liquidity in the financial system this month. The size of the infusion roughly matches the amount of cash the central bank drained with its medium-term lending facility on Monday.
“Such operational twist will allow PBOC to expand balance sheet, inject liquidity, but at the same time keeping yield curve steep and upward sloping,” said Becky Liu, head of China macro strategy at Standard Chartered Bank HK Ltd.
© 2024 Bloomberg
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