(Bloomberg) -- At least four Chinese brokerages have started fresh measures to cut back trading of domestic government bonds beginning last week, people familiar with the matter said.
The brokers reduced the trading of sovereign debt with one of them even suspending transactions in some maturities, the people said, requesting not to be named discussing private matters. While most of the firms called it a voluntary move, one person said the change came following guidance from the authorities.
China’s 10-year bonds extended recent losses Monday after the central bank also warned about potential risks arising from the relentless rally in the debt market.
The latest developments follow sweeping efforts from the authorities to fight back against the bond rally. Yields had been hitting new lows for months amid economic gloom and bets on interest-rate cuts, but have started to climb in recent days in a sign investors are finally taking heed of the warnings.
“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.”
One of the brokers has suspended so-called bridge dealing, where the firm takes the role of a mediator for transactions, one of the people said.
Trading volumes for the most active 10-year government bonds fell to 77 billion yuan ($10.7 billion) Friday, just 45% of last week’s high reached on Tuesday, according to data from the China Foreign Exchange Trade System.
Among new measures to rein in bond bulls last week, state banks unexpectedly began selling seven- and 10-year bonds to push up yields, while local authorities asked some rural lenders to suspend trading in sovereign debt. Regulators were also reported to have slowed the approval for new bond funds.
The selling continued on Monday with state banks selling seven-year bonds in the afternoon, said traders, who asked not to be identified as the information was private.
The People’s Bank of China on Friday used a quarterly monetary policy report to warn against the risks of what it considers a bond-market bubble.
The benchmark 10-year yield climbed four basis points Monday to 2.24%, the highest level in three weeks. That followed a gain of about seven basis points last week when the authorities widened their net to target everything from fund companies to rural banks to arrest the rally.
The PBOC’s bid to quash the bond rally comes partly from a risk management perspective, said Hui Shan, chief China economist at Goldman Sachs Group Inc. in Hong Kong, speaking on Bloomberg Television. The policy action “is just managing the pace of long-term yield decline rather than reversing” it, she said.
--With assistance from Catherine Bosley and Wenjin Lv.
(Updates to add Chinese state banks selling seven-year government bonds on Monday in 9th paragraph.)
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