China Bond Traders Draw Red Lines as PBOC Gears Up to Calm Rally


(Bloomberg) -- Bond traders are getting ready for China to start pushing back on record-low yields, with the central bank now armed with “hundreds of billions” of yuan of securities at its disposal to sell.

Traders are drawing two red lines at 2.25% and 2.45% for the 10-and 30-year yields respectively, as they expect the People’s Bank of China may start selling bonds at those levels, according to the median of a Bloomberg survey of 14 traders and analysts. More than two-thirds of respondents see any pushback as having just a modest impact, with yields rising five to 10 basis points should the PBOC intervene.

“The intention of bond selling is not designed to increase yield levels significantly, but to prevent an exuberant rally from here,” said Kiyong Seong, lead Asia macro strategist at Societe Generale SA in Hong Kong. 

Last week, the PBOC took a major step toward selling bonds to cool the rally, announcing agreements with lenders to borrow securities to be sold. And while benchmark 10-year yields have climbed from a record low 2.18%, they remain close, trading around 2.27% on Tuesday.

Just over a third of respondents expect yields to be range-bound in July in case the PBOC doesn’t start bond sales, the survey showed. 

A broad pessimism over the outlook for the world’s second-largest economy has fanned China’s bond market, while the lack of alternative investment opportunities for onshore investors has added to the bid for haven assets. Demand has been so strong that even an increase in government borrowing has failed to put off buyers.

However, the slump to all-time low yields has become a cause of concern for policymakers who fear a possible bubble forming in the market and losses for investors should yields rebound sharply in the future. That led to verbal warnings and now plans to borrow and sell bonds.

If the PBOC conducts bond selling at scale in the current quarter, it should not only have a direct impact on yields but also halt some of the speculative activity and generally push yields up, said Lynn Song, Greater China chief economist at ING Groep NV. But a turnaround in the economy is a more secure path to higher yields, he added.

“If economic data and the stock market recover faster than expected, this could drive some of the safe haven flows back from bonds into stocks and other risk assets,” Song said. “This would likely be more effective in putting out the bond rally.” 

--With assistance from Tania Chen and Qizi Sun.

©2024 Bloomberg L.P.