Shanghai (Business Emerge), August 16: China’s prolonged bond rally has come to an abrupt halt as intensified intervention by Beijing has led to declining bond prices and dwindling market turnover. Investors have begun stepping back as the central government takes strong measures to prevent yields from dropping further.
Friday marked the second consecutive week of losses for ten-year treasury futures, poised for their steepest two-week decline in almost a year. This comes despite a series of poor economic indicators that would typically encourage bets on further policy easing and increased bond purchases in one of the world’s largest government bond markets.
Throughout the week, state banks became significant sellers, and warnings from media outlets linked to the People’s Bank of China appear to have curbed excessive buying. The effect was evident as some domestic wealth management products that hold bonds saw their values dip below their net asset values. This market behavior signals a cautious approach as a wave of new bond issuances is expected in the near future.
Julio Callegari, Chief Investment Officer for Asia fixed income at J.P. Morgan Asset Management, noted, “We’re witnessing a new phase of action from the PBOC.” He has been reducing his exposure to Chinese government bonds over the past few months, influenced by the central bank’s rhetoric aimed at tempering the rally and in anticipation of increased bond issuance in the coming months. “We are moving towards a more neutral stance, with smaller long positions,” he added, suggesting that yields might eventually find stability.
The last two weeks have seen a concentrated focus on long-dated bonds as China highlighted the risks of an asset bubble. The government has imposed restrictions on the duration of new bond funds and tightened oversight of brokers’ and banks’ bond transactions. On Friday, ten-year yields were up by nearly ten basis points from the previous week’s record lows, while 30-year yields increased by 8 basis points to 2.383%, reflecting the inverse relationship between bond prices and yields.