China steps up warnings on relentless bond-buying frenzy

CHINA has ramped up warnings against bond bulls via state media reports amid signs the frenzy to buy government debt is trickling back.  

Bond funds will find it difficult to sustain the returns which have exceeded 10 per cent in some cases so far this year, Financial News, backed by the People’s Bank of China (PBOC), said in a report on Saturday (Jun 15), cautioning that investors should not bet on further declines in market rates.

“If bond yields rise in the future, products with longer-duration exposure will face larger risks of a retreat in capital gains,” the report said, citing unidentified people close to regulators. 

In another report late Friday, the newspaper said investors are underestimating factors such as a mild rise in prices that may upend the bond rally. Besides, the recent deposit outflows from banks to asset management firms will only temporarily boost funds’ cash level and demand for bonds, it said. 

The PBOC has repeatedly hinted at its discomfort over the bond rally in the past few months as long-term yields touched two-decade lows. While lower yields mean cheaper borrowing costs for the economy, they can also destabilise financial markets and derail the recovery should speculative trading grow. 

There are few signs of the enthusiasm fading. A 50-year special bond auction last week drew solid demand, while 30-year government bond yields declined to the lowest level in more than seven weeks on Friday to 2.49 per cent.

The verbal warnings may put a floor on the 30-year yields at around 2.4 to 2.5 per cent, but the bond moves may still be biased lower in the absence of more forceful measures to halt the rally, Huatai Securities strategists wrote in a note. BLOOMBERG