The People’s Bank of China announced it would ‘borrow sovereign bonds from primary traders in the open market in the near future’.
China’s central bank plans to intervene directly in bond markets, signaling officials’ growing discomfort with a rally that has pushed borrowing costs to their lowest level in two decades.
The People’s Bank of China stated on Monday it would “borrow sovereign bonds from primary traders in the open market in the near future”.
This decision was based on “prudent observation and evaluations of current market situations” to “maintain the stable operation of the bond market”.
This statement was made as the yield on China’s onshore 10-year government bond dropped two basis points to 2.18 percent, the lowest since Bloomberg began tracking the data in 2002.
Investors have flocked to bonds seeking safe assets in a weak economy. Experts indicated the PBoC’s statement suggests it aims to cool the market rally by selling bonds to reduce demand.
“The PBoC will become a regular and active trader on the secondary market of sovereign bonds going forward,” said Zhang Ming, a senior fellow and the deputy director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, a state think-tank.
“The Chinese government is on track to significantly increase the sale of its sovereign bonds in the coming years,” he added.
Following the statement, the yields on China’s 10- and 30-year government bonds rose to 2.2 percent and 2.4 percent respectively. Bond yields rise as prices fall.
Chinese regulators are concerned by the rush for sovereign bonds. The PBoC has repeatedly warned that the market’s excessive appetite risks a crisis similar to the collapse of Silicon Valley Bank in the US last year.
“Today’s announcement means the PBoC would sell sovereign bonds soon on the open market,” said Ming Ming, chief economist at Citic Securities. “A central bank sale would help stabilize the yield level at the longer end of the curve, and prevent rate risks.”
PBoC governor Pan Gongsheng stated two weeks ago at a forum that the bank was prepared to trade sovereign bonds in the secondary market. He emphasized that the PBoC’s upcoming trade of sovereign bonds was not equivalent to quantitative easing.
“Including government bond buying and selling into the monetary policy toolbox doesn’t mean we’ll do quantitative easing,” said Pan. “It is meant to be a channel for base money injection and a tool for liquidity management.”
