(Bloomberg) -- A sense of greater urgency to stoke growth will likely keep the People’s Bank of China from intervening in the bond market in the short term, keeping a record-breaking rally alive, according to analysts.
For some that means benchmark yields could fall to as low as 2.1%, despite the central bank’s warning it may sell bonds to cool the market and hints through state media earlier this year that closer to 2.50% was more appropriate. For others what’s key to watch is the shape of China’s yield curve — the gap between shorter- and longer-dated debt.
The PBOC is walking a tightrope between supporting growth and trying to rein in a bond rally that could send financial shocks to the economy if it reversed in a disorderly manner.
“In the short run its bond selling may not land soon before authorities sort out their policy combination,” said Zhaopeng Xing, a senior China strategist at ANZ Bank China. “The next catalyst for the PBOC pushback will be dependent on economic growth, including economic data in the next two months.”
After China’s growth slowed to its worst pace in five quarters, the Politburo, a 24-member decision-making body led by President Xi Jinping, on Tuesday signaled officials are mulling more growth measures. It also vowed to stabilize or even guide borrowing costs lower, a stance somewhat at odds with higher yields for longer-dated debt.
“China’s central bank’s tolerance level for the bond bull definitely has been lifted,” said Qi Sheng, chief fixed-income analyst at Orient Securities Co. “It feels that the central bank’s obsession with demanding a steeper curve has waned lately, as it didn’t give any warning to bond investors.”
The gap between 10- and 2-year yields widened to levels last seen in 2020 in July but the move has since pared. The 10-year yield traded at 2.14% on Wednesday, down from 2.56% at the end of last year, while the 2-year equivalent was at 1.53%.
“A further rapid flattening of the curve will be the trigger for a PBOC pushback, considering the financial systemic risks related to banks,” said Xiaojia Zhi, chief China economist at Credit Agricole SA.
Rally Resumption
Last week’s surprise interest-rate cuts have helped reignite the bond market rally as have pessimistic signals on the economy such as data showing factory activity shrank for a third month. State media also flagged this week the possibility for further stimulus — in this case a reduction in the amount of money banks have to keep in reserve instead of lending to customers.
While the PBOC said it had been preparing to borrow and sell government bonds to push yields higher, it has been noticeably quiet this week.
“Though the PBOC has sent repeated warnings to the markets on the bond rally, markets are waiting for the real actions to gauge its impact,” said Xiaojia Zhi, chief China economist at Credit Agricole. “There is a limit to what the PBOC could achieve given its multiple targets.”
Still, some analysts expect a rapid drop in long-end yields may be what prompts the central bank to intervene.
“The 10-year yield will likely remain suppressed over the coming weeks, as the government rolls out additional policy support,” said Carlos Casanova, senior Asia economist at UBP. “Levels around 2.10% are too low and could be considered a red line.”
--With assistance from Yujing Liu.
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