China’s Central Bank Intervenes in Bond Market

SHANGHAI (Reuters) – China’s central bank made its first bond purchase in nearly two years by buying special government bonds from primary dealers on Thursday. This move has revived speculation about potential interventions in the domestic debt market.

The People’s Bank of China (PBOC) purchased 400 billion yuan ($56.3 billion) worth of 10-year and 15-year bonds in open market operations, as announced on its website.

The announcement followed a day after the central bank revealed a new section for its announcements related to buying and selling government bonds, further fueling speculation about impending interventions.

In recent weeks, the central bank has warned about inflated bond prices driving yields to record lows as banks and investors look for safe assets amid economic uncertainty.

In July, the PBOC disclosed it has hundreds of billions of yuan in bonds it can borrow, indicating it would sell them according to market conditions. The recent purchase is expected to lead to the PBOC’s intervention to prevent yields from falling further.

“Banks bought the treasuries from the finance ministry, and then sold them to the PBOC, which is ready to offload them in the market,” said an anonymous fund manager.

Despite this news, bond yields remained unaffected. Traders noted a prior government announcement about rolling over maturing bonds, which analysts suggested was a strategy to maintain cash flow without adverse effects on the market.

As of now, China’s 10-year government yield is trading at 2.17%, down approximately 40 basis points for the year.

“Concerns over long-term yields had initially decreased, but this announcement has stirred market worries again,” commented Xing Zhaopeng, senior China strategist at ANZ.

In addition, state banks have been observed selling bonds this month, potentially acting on the central bank’s behalf. To moderate the bond rally, China’s securities regulator has instructed some brokerages to scrutinize their bond trading activities.

The PBOC had last purchased special treasuries from primary dealers in December 2022.

($1 = 7.1001 Chinese yuan renminbi)