SHANGHAI/BEIJING (Reuters) –

Chinese treasuries fell on Friday after state media reported that trading accounts should not be borrowed or transferred. This follows the initiation of a probe by regulators into potential misconduct in the booming bond market.

Borrowing or transferring interbank bond trading accounts could lead to an increase in non-compliant transactions, distort market prices, and heighten credit risks, according to a newspaper affiliated with the central bank.

This week, Chinese regulators began investigating small financial institutions regarding their trading practices as the People’s Bank of China (PBOC) intensified efforts to cool down the rapidly rising treasury bond market.

China’s 30-year treasury futures decreased by as much as 0.7% in early trading on Friday, while 10-year bond futures dropped 0.3%. Both instruments are set for a weekly decline, ending a four-week winning streak.

Treasury yields, which move inversely to prices, rose across the board on Friday.

The National Association of Financial Market Institutional Investors (NAFMII), supervised by the PBOC, announced on Wednesday it would investigate four rural commercial banks for suspected bond market manipulation.

NAFMII revealed on Thursday that it had identified irregularities in bond trading by certain smaller financial institutions, particularly related to borrowed accounts, and has reported serious offenders to the central bank for action.

Using trading accounts by non-owners in exchange for a rental fee often leads to misdirected money flows and possible interest conflicts, the Financial News reported.

This practice further distorts market prices and increases credit risks since account owners cannot regulate transactions, according to the newspaper, which is viewed as a central bank spokesperson.

In April, NAFMII also questioned some small financial institutions regarding similar trading violations, including account borrowing, as noted in the newspaper.

Employees from some financial institutions reportedly colluded with external parties to engage in illegal activities, betting on declining treasury yields, the report stated.

The central bank has consistently cautioned against reckless investments in a bond market rally driven by a bleak economic outlook, expressing concerns over potential bubbles that could lead to crises similar to that of Silicon Valley Bank.

Additionally, the PBOC has stated its goal of maintaining an upward-sloping yield curve to create positive incentives for investment.