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 traders 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 remain 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 don’t see a rosy economic picture … and we’re under peer pressure to generate returns,” stated the Beijing-based supervisor who requested to be nameless as a result 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 traders chase authorities bonds and scurry away from unstable shares and a sinking property market, whereas banks minimize 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 value strikes within the nation’s inventory and forex markets.
In contrast to the West, “China’s financial markets, including the bond market, are subject to top-down regulation,” stated Ryan Yonk, economist with the American Institute for Financial Analysis.
Because the financial system sputters, “Chinese officials will face increasing difficulty in maintaining such tightly controlled financial markets, and additional interventions are likely, and may signal the very instability Chinese officials are seeking to avoid.”
FIRST SHOT
The primary shot was fired final Monday, when China’s long-dated yields hit document lows amid a worldwide rout that drove cash into secure havens reminiscent of treasuries.
State banks have been seen promoting massive quantities of 10-year and 30-year treasuries after treasury futures jumped to document 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 huge banks as brokers at occasions to affect the yuan forex market, merchants stated.
Late on Friday, the central financial institution stated it’ll step by step improve the acquisition and sale of treasury bonds in its open market operations.
PBOC Governor Pan Gongsheng was beforehand head of China’s international forex regulator, so “it appears to be the same playbook,” stated a Shanghai-based fund supervisor.
In one other warning shot to bond patrons, the PBOC ceased offering money by open market operations on Wednesday for the primary time since 2020, contributing to the most important weekly money withdrawal in 4 months in help of yields.
Dealing an extra blow to market sentiment, China’s interbank watchdog stated it might examine 4 rural industrial 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 traders cautious. Each China’s 10-year and 30-year treasury futures posted their first weekly fall in a month.
“Taking all factors into account, it would be prudent to exercise additional caution regarding China duration risk,” Kiyong Seong, lead Asia macro strategist at Societe Generale (OTC:) stated, referring to the chance of holding long-dated bonds.
“While the scale of any selloff in China bonds may not be substantial in the medium and long term due to the fragile growth momentum in China, chasing duration returns in China does not seem appropriate 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 briefly provide, “the bond bull remains alive,” Tan stated.
The Shanghai-based fund supervisor stated there isn’t any cause to throw within the towel with out seeing clear indicators of financial enchancment, and his technique is to “buy on the dip”.
“You cannot change market direction using technical tools, just as you cannot change the temperature by adjusting the thermometer,” he stated.
The PBOC strikes might change the tempo of bond value rises, however not the uptrend, he stated. “If you hold long enough, you will make money.”
Nonetheless, rising volatility reveals the central financial institution is a minimum of making some progress in giving traders pause for thought.
Chun Lai Wu, head of Asia Asset Allocation at UBS International Wealth Administration, cautioned that anticipated help 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 at the moment round 2.37%, in contrast with 3% a yr in the past.
“Over the long term, we could see the … yield drift higher, maybe towards 2.5%, if indeed we see the economic recovery continue and inflation begin to return.”
($1 = 7.1715 renminbi)
