(Bloomberg) -- China delivered one of its most direct warnings yet to bond investors, returning to harsh rhetoric to curb a fall in yields after a salvo of measures to squeeze speculators failed to ignite a sustained turnaround.
Authorities will crack down on any illegal actions that disrupt the bond market and threaten systemic risk, according to a commentary Wednesday in a newspaper backed by the People’s Bank of China. The article came as traders rushed back into bonds after poor bank loan data fueled pessimism on the economy and yields pared their drop after it was published.
“One-sided declines in long-dated bonds can lead to the creation of significant financial risks,” the Financial News commentary said. “Once the market reverses, quick unwinding of leveraged positions will lead to a spiral of declines which can be contagious and spill over to other financial markets.”
Beijing has widened its battle against speculators through subtle measures such as gathering financial institutions for meetings and probing the bond trading of some small rural lenders. Officials have been seeking to limit risks at some firms, wary of the 2023 collapse of Silicon Valley Bank, which piled into US Treasuries before a market reversal.
The measures had helped pull yields off record lows but bond buyers returned in recent days amid bets the PBOC will have to cut interest rates further to support growth.
Traders Shrug Off China Pushback to Wade Back Into Bonds
The PBOC aims to prevent systemic risk and ensure financial stability, the Financial News said. Recently, some institutions have lent out their bond trading accounts and quoted prices that were significantly higher than market levels, it added.
“It doesn’t mean an investor can get steady returns as long as he buys bonds,” Financial News said. “When one makes a decision to invest in bonds, the buyer needs to understand he’s responsible for the risks being taken.”
The yield on seven-year bonds pared losses of as much as six basis points — the most since 2022 — to trade just two basis points down at 2.09% on Wednesday afternoon. The 10-year yield was little changed at 2.19%.
For Becky Liu, head of China macro strategy at Standard Chartered Bank, the article won’t change the fundamentals behind the bond rally.
“It serves only as another warning,” she said. “Increasing the issuance of long-dated government bonds or providing a systematic and rule-based guidance to financial institutions would be much more effective to change the outlook of long-dated bonds.”
--With assistance from Qingqi She.
©2024 Bloomberg L.P.
