(Bloomberg) -- The People’s Bank of China did not seek to nor will it seek to ban legitimate investments or trading in its government bonds, but it sees risks in a buying spree of the securities, according to people familiar with the matter.
The PBOC gave risk warnings to some small- and medium-sized financial institutions which had significantly boosted holdings of long-dated bonds within a short time, according to people familiar with the central bank’s thinking. Any rumor of the PBOC banning sovereign debt trading was a misinterpretation and is something the central bank will not do, they said.
On the other hand, the PBOC doesn’t want to see a persistent slide in long-term yields, which is not sustainable and can lead to an accumulation of risks as some investors blindly follow the moves, they added. Investors need to understand the market can reverse, said the people, who asked not to be identified as the matter was private.
The PBOC believes market panic can lead to a spiral increase in yields once the issuance of government bonds speeds up later this year, they said. That may trigger new macro risks, the people added.
Trading volume of China’s government debt plunged this week amid concerns policymakers may escalate their fight against buyers who recently pushed yields to record lows.
Over the past month, the authorities sought to curb the sizzling rally through measures including having state banks sell their bonds holdings and gathering financial institutions for meetings. They recently also initiated probes into trading by some small lenders.
While China hopes to prevent a bond bubble that may endanger financial stability, traders are betting on haven assets amid volatile stocks and falling property prices. That means the gap is widening between officials keen on avoiding a build up of risk and investors moving quickly to where they believe they can find returns.
Some rural commercial lenders were trading like hedge funds and digressed from their main business of supporting the real economy via making loans, according to the people. Some were even placing long wagers on cash government bonds and shorting the futures, they said.
While the central bank won’t make a decision on behalf of the market, it thinks it’s important to keep the bond market stable, they said.
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