(Bloomberg) -- China’s goal of nipping a bond-market bubble in the bud was looking increasingly distant Monday as a record-breaking rally extended.
Yields on sovereign debt fell on Monday, with the rate on 30-year bonds dipping below 2.4% for the first time in nearly two decades and the benchmark 10-year sliding to a record low. The declines have sent yields way below levels where traders once suspected the central bank would intervene by borrowing and selling bonds to reverse the moves.
For months, the People’s Bank of China has been torn between preventing a liquidity-fueled bubble in the debt market and ensuring low borrowing costs to rejuvenate the economy. Although concerns about direct intervention helped to tame the bond rally in early July, Beijing’s surprise interest rate cuts last week have given bulls a fresh impetus.
Adding to the PBOC’s list of obstacles, a gauge of short-term funding costs in the money-market dropped to the lowest since February — an unusual move as it typically rises toward the end of a month as liquidity dries up. The lower cost makes it easier for traders to buy bonds with borrowed cash, adding fuel to the demand fire.
“If the market becomes overly lop-sided, it shall not be surprising for the PBOC to kick-start bond selling under monetary operations,” said Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking Corp. in Singapore.
The yield on 10-year government bonds dropped three basis points to 2.1525%. The overnight repurchase rate was last at 1.64%.
Long-end bonds may be pressured by authorities’ intervention including bond selling by the central bank, according to Samuel Tse, economist and market strategist with group research at DBS Bank (Hong Kong) Ltd.
“Chinese government bond’s yield curve will steepen further on recent rate cuts,” he said. “However, we think 10-year yields will likely return to 2.20%-2.25%” this year.
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