(Bloomberg) -- China’s early successes at curbing a government-bond rally are fast evaporating.
Sovereign yields fell across the curve on Wednesday morning, with those on seven-year bonds sliding the most since 2022, as traders digested the first bank loan contraction in nearly two decades. The data cemented bets that the People’s Bank of China will have to ease monetary policy further, undermining this week’s yield rebound, which was triggered by a slew of measures to squeeze out speculators.
Behind the wild swings is a widening gap between where officials believe yields should be and where debt traders see fair value as the economic clouds darken. While the former hopes to ensure financial stability by preventing a bond bubble, the latter wants to buy even more haven assets amid slumping stocks and falling property prices.
“Intervention can help in the short term, but China likely needs either increased fiscal stimulus or macro data to turn for yields to rise sustainably,” said Albert Leung, a rates strategist at Nomura Holdings Inc.
Beijing has widened its battle against speculators, targeting everything from fund houses to rural banks, in a bid to pull government yields off record lows. The lower they fall, the more authorities are on edge, as any sudden reversal could send shock-waves through a sluggish economy.
Officials have been seeking to limit risks at its financial institutions, wary of the collapse of Silicon Valley Bank, which piled into US Treasuries before yields rose. But traders have been playing cat and mouse with authorities, paying a premium for government bonds to evade regulators, people familiar with the matter said.
China will resolutely crack down on illegal activities that disrupt order in the bond market, a commentator wrote in an article published Wednesday by the PBOC-backed Financial News.
Sovereign bonds seem to be a rare bright spot in China’s financial markets this year, rallying on the back of expectations of more interest rate cuts. The benchmark yield tumbled to a record low of around 2.12% earlier this month.
China’s Rare Loan Drop Stokes Fears of ‘Balance Sheet’ Recession
On Wednesday, the yield on seven-year government bonds dropped three basis points to 2.07%, while the 10-year yield was little changed around 2.19%. Yields hit a record low at an auction of 20-year special government bonds, while a gauge of onshore stocks slipped 0.6%.
“With no better investment alternatives seen by investors, various measures may only be able to set a floor to long-end yields,” said Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking Corp.
--With assistance from Wenjin Lv and Charlotte Yang.
(Updates with Financial News article)
©2024 Bloomberg L.P.