SHANGHAI/HONG KONG (Reuters) – China’s bond market, the world’s second largest, is on edge following a turbulent week wherein the central financial institution began intervening closely to stem a plunge in yields even because the financial system is struggling.
However die-hard buyers say the bull market in authorities bonds nonetheless has legs, citing China’s wobbly financial system, deflationary pressures and low investor urge for food for riskier property.
“We stay actively bullish,” stated a bond fund supervisor, undeterred by unprecedented authorities strikes to chill the scorching treasury market and arrest a plunge in yields, which transfer inversely to costs.
“We do not see a rosy financial image … and we’re beneath peer strain to generate returns,” stated the Beijing-based supervisor who requested to be nameless because of sensitivity of the subject.
Even those that have turned bearish seem half-hearted. Treasury futures investor Wang Hongfei stated he selected to be “opportunistic” within the quick time period, buying and selling shortly in skirmishes because the market tussle with regulators intensifies.
China’s central financial institution has repeatedly warned of probably destabilising bubble dangers as buyers chase authorities bonds and scurry away from risky shares and a sinking property market, whereas banks lower deposit charges. Falling yields additionally complicate the Folks’s Financial institution of China’s (PBOC) efforts to stabilise the weakening yuan.
However with the PBOC now turning threats into motion to tame bond bulls, authorities have opened a brand new battle entrance – following wars of attrition lengthy fought towards speculators and unwelcome worth strikes within the nation’s inventory and foreign money markets.
Not like the West, “China’s monetary markets, together with the bond market, are topic to top-down regulation,” stated Ryan Yonk, economist with the American Institute for Financial Analysis.
Because the financial system sputters, “Chinese language officers will face growing problem in sustaining such tightly managed monetary markets, and extra interventions are possible, and will sign the very instability Chinese language officers are searching for to keep away from.”
FIRST SHOT
The primary shot was fired final Monday, when China’s long-dated yields hit file lows amid a worldwide rout that drove cash into secure havens corresponding to treasuries.
State banks had been seen promoting massive quantities of 10-year and 30-year treasuries after treasury futures jumped to file highs.
Debt dumping by state banks – confirmed by information and merchants – continued all through the week, mirroring how the central financial institution makes use of massive banks as brokers at occasions to affect the yuan foreign money market, merchants stated.
Late on Friday, the central financial institution stated it is going to regularly enhance the acquisition and sale of treasury bonds in its open market operations.
PBOC Governor Pan Gongsheng was beforehand head of China’s overseas foreign money regulator, so “it seems to be the identical playbook,” stated a Shanghai-based fund supervisor.
In one other warning shot to bond consumers, the PBOC ceased offering money by means of open market operations on Wednesday for the primary time since 2020, contributing to the most important weekly money withdrawal in 4 months in assist of yields.
Dealing an additional blow to market sentiment, China’s interbank watchdog stated it could examine 4 rural business banks for suspected bond market manipulation, and would report a number of misbehaving monetary establishments to the PBOC for penalty.
The PBOC didn’t reply to a Reuters request for remark.
‘SWORD OF DAMOCLES’
To make sure, the flurry of measures have made some buyers cautious. Each China’s 10-year and 30-year treasury futures posted their first weekly fall in a month.
“Taking all elements under consideration, it could be prudent to train extra warning concerning China period danger,” Kiyong Seong, lead Asia macro strategist at Societe Generale stated, referring to the chance of holding long-dated bonds.
“Whereas the dimensions of any selloff in China bonds is probably not substantial within the medium and long run as a result of fragile development momentum in China, chasing period returns in China doesn’t appear applicable in our view.”
Tan Yiming, analyst at Minsheng Securities, wrote in a be aware: “The sword of Damocles is falling.”
However in a so-called “asset famine” setting the place high-yielding property are in brief provide, “the bond bull stays alive,” Tan stated.
The Shanghai-based fund supervisor stated there is not any purpose to throw within the towel with out seeing clear indicators of financial enchancment, and his technique is to “purchase on the dip”.
“You can not change market path utilizing technical instruments, simply as you can’t change the temperature by adjusting the thermometer,” he stated.
The PBOC strikes may change the tempo of bond worth rises, however not the uptrend, he stated. “In the event you maintain lengthy sufficient, you’ll earn cash.”
Nevertheless, rising volatility exhibits the central financial institution is a minimum of making some progress in giving buyers pause for thought.
Chun Lai Wu, head of Asia Asset Allocation at UBS International Wealth Administration, cautioned that anticipated assist to Chinese language bonds from any financial easing will possible be offset considerably by stepped-up authorities bond issuance.
China’s 30-year treasury yield is presently round 2.37%, in contrast with 3% a 12 months in the past.
“Over the long run, we may see the … yield drift increased, perhaps in direction of 2.5%, if certainly we see the financial restoration proceed and inflation start to return.”
($1 = 7.1715 Chinese language yuan renminbi)
(Reporting by Li Gu and Samuel Shen in Shanghai; Summer time Zhen in Hong Kong; Modifying by Kim Coghill)
