China’s bond market is in turmoil as central bank confronts bond bulls | Wilnesh News

The world’s second-largest bond market is on edge after a tumultuous week in which central banks began to intervene aggressively to stem a plunge in yields even as the economy struggled.

But die-hard investors say a bull market in government bonds remains, pointing to China as an example economic instabilitydeflationary pressure, and investors’ interest in risky assets is low.

“We remain aggressively bullish,” one bond fund manager said. Unprecedented Government Initiative Cool down the red-hot Treasury market and stop yields from plunging, as yields move inversely with prices.

“We don’t see a positive economic outlook… and we face peer pressure to generate returns,” said the Beijing-based manager, who requested anonymity due to the sensitivity of the topic.

Even those turning bearish appear half-hearted. Wang Hongfei, an investor in Treasury futures, said he chose to be “opportunistic” in the short term, trading quickly in skirmishes as the market’s battle with regulators intensified.

China’s central bank has repeatedly warned of the risk of destabilizing bubbles as investors chase government bonds, flee volatile stocks and a declining property market, while banks cut deposit rates. Falling yields also complicate the People’s Bank of China’s efforts to stabilize the weakening yuan.

But with China’s central bank now turning threats into action to rein in bond bulls, the authorities have opened a new front after a long war of attrition with speculators and unwelcome price swings in China’s stock and currency markets.

Ryan Yanke, an economist at the American Institute for Economic Research, said that unlike the West, “China’s financial markets, including the bond market, are regulated from the top down.”

As the economy slumps, “Chinese officials will face increasing difficulties in maintaining such tightly controlled financial markets and may resort to additional intervention measures that could signal the instability that Chinese officials are seeking to avoid.”

The first shot was fired last Monday, when a plunge in global stock markets sent funds into safe-haven assets such as U.S. Treasuries and pushed long-term yields in China to record lows.

State banks sold 10-year and 30-year Treasuries heavily after bond futures jumped to record highs.

The debt dumping by state banks continued throughout the week, traders said, and was confirmed by data and traders, reflecting how the central bank sometimes uses big banks as agents to influence yuan currency markets.

Late on Friday, the central bank said it would gradually raise interest rates. Buy and sell Open market operations for Treasury securities.

Pan Gongsheng, governor of the People’s Bank of China, previously served as head of China’s foreign exchange regulator, so “it seems to be the same playbook,” said a Shanghai-based fund manager.

In another warning to bond buyers, the People’s Bank of China stopped providing cash through open market operations on Wednesday for the first time since 2020, leading to the largest weekly withdrawal of cash in four months to support yields.

China’s interbank regulator says it will further dampen market sentiment investigation Four rural commercial banks are suspected of manipulating the bond market and will report multiple financial institutions with bad behavior to the People’s Bank of China for punishment.

China’s central bank did not respond to Reuters’ request for comment.

Admittedly, a series of measures have made some investors cautious. China’s 10-year and 30-year government bond futures both posted their first weekly losses in a month.

Kiyong Seong, chief Asia macro strategist at Societe Generale, said of the risks of holding long-dated bonds that “all things considered, it would be prudent to take an extra cautious approach to China duration risk.”

“Since China’s growth momentum is fragile, the scale of the sell-off in Chinese bonds may not be large in the medium to long term, but we believe that chasing China’s duration returns does not seem appropriate.”

“The sword of Damocles is falling,” Minsheng Securities analyst Tan Yiming wrote in a report.

But in a so-called “asset starvation” environment where high-yield assets are in short supply, “bond bulls still exist,” Tan said.

The Shanghai-based fund manager said there was no reason to throw in the towel until he saw clear signs of economic improvement and his strategy was to “buy the dip.”

“You can’t change the direction of the market using technological tools any more than you can change the temperature by adjusting a thermometer,” he said.

He said China’s central bank’s move could change the pace of bond price increases but would not change the upward trend. “If you hold it long enough, you’ll make money.”

However, rising volatility suggests the central bank is at least making some progress in giving investors pause for thought.

Wu Chunlai, head of Asia asset allocation at UBS Global Wealth Management, warned that any expected support for Chinese bonds from monetary easing may be offset to some extent by an increase in government bond issuance.

The current yield on China’s 30-year government bonds is about 2.37%, compared with 3% a year ago.

“Longer term, if we do see a sustained economic recovery and inflation starts to return, we may see … yields move higher, possibly to 2.5%.”