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China’s central bank purchased Rmb400bn ($56.3bn) of long-dated sovereign bonds on Thursday, a move that traders interpreted as preparation to directly shore up bond yields in its booming debt markets.
The People’s Bank of China said it bought Rmb300bn worth of 10-year notes and Rmb100bn of 15-year notes from primary dealers, which had been sold by the Ministry of Finance to roll over maturing bonds only earlier in the day.
Analysts said the move, which stops the bonds from being traded in the market, further fuelled speculation that China’s central bank will soon intervene in the bond market to prevent an eventual snapback that could trigger Silicon Valley Bank-style losses in the financial system.
Chinese debt has rallied this year as global investors bet that Beijing will be forced to stimulate consumer demand in the world’s second-largest economy.
But the PBoC has repeatedly warned that falling yields — which move inversely to prices — risk provoking a liquidity crisis in the banking system. Earlier in the summer, the PBoC said it was ready to directly buy and sell in the market for the first time in decades to prevent a sharp fall in long-term yields.
“The PBoC is trying to engineer the yield curve”, said Wei Li, head of multi-asset investment for BNP Paribas in China, who described the buying action as a “sizeable amount”. “Now they have a lot more long-term debt on hand [because] speculators are betting against the central bank,” Li added.
Traders’ expectations that the central bank would soon buy and sell sovereign notes were fuelled by the PBoC’s creation of a new section on its website called “notices on the purchase and sale of sovereign bonds”.
Chinese authorities have been concerned about the yields on longer-dated debt as it is a source of funding for financial institutions such as pension funds.
Analysts said that purchasing the bonds gave the central bank the flexibility to sell at a later date, influencing the prices of 10-year to 15-year bonds. Selling long-dated debt in the market would raise yields.
The newly purchased notes, with a maturity of 10 to 15 years, would replace previous notes with the same amount but would only carry a duration of seven years, said He Xueqin, an analyst with Guangfa Securities. So far, the PBoC only holds Rmb1.52tn in government bonds, mostly with shorter maturities ranging from one to three years.
“The increased holdings of the long-term bonds will give PBoC better control in yields, and the approach for the PBoC to managing the short- and long-term yield curves will also become more diverse,” said He.
China’s central bank has adopted various approaches this year to indirectly shore up sovereign bond yields, including verbal warnings and regulatory inspections.
But investors have nevertheless defied the warnings and continued to buy bonds, sending the long end of the curve to historical lows. The yield of 10-year government bonds fell to a level of 2.12 per cent before it rebounded to 2.17 on Thursday.
“[Buying the bonds] might seem like an odd move given that the central bank has spent recent months trying to prevent yields from falling,” said Julian Evans-Pritchard, head of China economics at Capital Economics in London. “But most signs suggest that it still intends to reduce its government bond holdings rather than increase them.”
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