(Bloomberg) -- China watchers expressed some skepticism about the central bank’s ability to influence downward pressure on yields, despite it readying a pool of hundreds of billions of yuan of bonds to sell to cool a rally.

While yields may edge higher in the short-term, the fundamentals driving investors to bonds are unlikely to change, according to analysts and strategists. The People’s Bank of China’s move is likely aimed at targeting the shape of the yield curve and for risk management purposes, they said.

Here’s what analysts and strategists had to say:

Gary Ng, senior economist at Natixis

PBOC agreement with financial institutions opens the door for it to intervene in the market to stem volatility. However, the current scale seems like it is more for a cyclical purpose as it will not be big enough to revert the market forces driven by economic rationales, such as the expectation of lower rates.

China’s 10-year bond yield will fall back to the record low of 2.18% by the end of 2024 due to possible limited impact of the intervention

Eugenia Victorino, SEB’s head of Asia strategy

China’s 10-year yield will rise toward 2.5% on the PBOC’s plan to sell bonds. Yields are likely rise, though the impact may only be short-term as excess liquidity is sloshing in the market.

It will also provide support for the yuan as rate-differentials with US yields tighten.

The persistence of the move is uncertain as long as there is a shortage of investable assets that provide attractive yields in China. Government bonds are still a preferred investment choice.

 Becky Liu, head of China Macro Strategy at Standard Chartered Bank HK Ltd.

The PBOC’s wants to reduce duration mismatch at smaller institutions with weaker risk management. i.e. simply trying to avoid what happened to SVB and Norinchukin.

It also wants to maintain upward sloping CGB yield curve to safeguard banking sector profitability after sharp NIM compression, and avoid sending a very negative signal to macro economic market outlook

We think their focus will remain on the 10-30 year part of the curve, but less concern about the front end.

But the move could potentially mop up interbank liquidity (i.e. PBoC selling CGBs and taking in cash from market), and probably will need to be offset by some alleviation on liquidity conditions, such as RRR cut

Yongbin Xu, co-chief investment officer at U-shine Investment Group

It’s still difficult for PBOC’s action to change the trend of bonds, the fundamentals plays a key role. Hundreds of billions of yuan are likely to only change the short-term “momentum” of the market.

The issuance of 30-year CGBs at a time is tens of billions of yuan, and the PBOC must have several hundred billions in hand to reverse the continuous downward trend of 30-year debt.

I still feel that the PBOC’s action is trying to prevent the 30-year CGB yield falling below 2.4%, which is a key position for it.

Zhaopeng Xing, senior China strategist at ANZ Bank China

The amount of bonds the PBOC can borrow could have a sustainable impact on the yield curve, given the very limited market depth of longer-maturity government bonds.

Daily turnover of 30-year bonds averages 100 billion yuan only. The size is too small compared with PBOC capability. In the short term, the lower bound for the 10-year yield may be 2.25% and for the 30-year it may be 2.50%.

PBOC only wants to maintain upward sloping yield curve to avoid financial instability. The current reasonable range of 2.25% to 2.40% is too close to the bottom.

Jenny Zeng, CIO fixed income APAC at Allianz Global Investors

Yields are at historical lows and could go even lower beyond the near term. This is due to China’s unique position in its economic cycle, with real rates still high relative to the current environment. 

After a strong bull run year to date, CGB yields are entering a consolidation phase. We believe there’s a limit on how much yields can actually rise from here, given China’s economic cycle.

The PBOC is putting a near-term floor on long-dated CGBs at around 2.2% for 10-year and 2.4% for 30-year. But such intervention shouldn’t change the overall monetary policy direction and medium term trend for CGB yields.

--With assistance from Jing Zhao, Qizi Sun, Karl Lester M. Yap and Tania Chen.

(Updates with quote from Allianz Global Investors)

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