CHINA’S 10-year bonds extended recent declines as the central bank warned about potential risks arising from the relentless rally in the debt market.
The benchmark yield headed for its biggest one-day gain since February on a closing basis after the People’s Bank of China (PBOC) said in a quarterly monetary policy report published on Friday (Aug 9) that wealth management products based on bonds were exposed to interest-rate risk and could lead to losses.
The 10-year yield climbed as much as five basis points to 2.25 per cent on Monday. That followed a gain of about seven basis points last week when the authorities intensified their battle against bond speculators by targeting everything from fund companies to rural banks to arrest the rally.
“The PBOC hopes to limit risks from what they deem to be excessive capital flows into the bond market,” said Lynn Song, Greater China chief economist at ING Bank in Hong Kong. “The threat of intervention is likely the main factor driving yields higher today, but whether or not this will last will likely depend on the actual strength of intervention.”
China’s sovereign debt has rallied this year as demand for haven assets has surged due to a sluggish economy and expectations of further rate cuts. The lack of attractive alternatives and a switch out of savings to financial investments has also increased investor appetite for government debt.
“Whether bond yields bottom depend on how serious the government is in fighting deflationary impulses in China to engineer more demand-side support,” said Trinh Nguyen, a senior economist at Natixis in Hong Kong. “So far, since the third plenum, we have seen rate cuts and also some demand-side support. More is needed.” BLOOMBERG
