(Bloomberg) -- China’s sovereign yield curve is steepening, a move that’s likely to be welcomed by authorities, as the threat of intervention prompts traders to slow purchases of longer term bonds.
Debt buying has been more pronounced on the shorter end of the curve this week, which has widened the yield spread between the two- and 10-year bonds to the most since July. The pattern matches the People’s Bank of China’s unprecedented move in August, when it sold long-dated bonds and bought short-maturity debt to curb the rally.
“The focus should be on the shape of the yield curve rather than trying to push up all yields,” said Lynn Song, Hong Kong-based chief Greater China economist at ING Bank N.V. “It is likely that the PBOC is concerned that the long-end bonds are overbought due to weak risk appetite” and as major holders of these bonds, banks are vulnerable to a selloff, he said.
The PBOC was seen as stepping up its push-back against the bond rally as after China’s 10-year yield touched a fresh record low this week, signaling a persistent intervention threat.
Some of the special sovereign bonds the PBOC bought from primary dealers last week were being sold in the secondary market, people familiar with the matter said on Thursday. Containing the relentless rally in bonds has been a challenge for the PBOC as prolonged economic weakness, expectations of interest-rate cuts and lack of attractive investment alternatives continue to drive the demand for debt.
The PBOC’s bond purchases and sales in August showcased its determination to control the shape of the curve, said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. A steeper yield curve is key for banks’ interest margins as the lenders have been tasked with boosting economic growth by extending loans, he said.
Xing expects the yield curve to flatten a bit with the PBOC seen cutting banks’ reserve requirement ratio by month-end. The yield curve steepening is unsustainable, he said.
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