China’s Bonds Seen Settling Into Range With Yield Floor on PBOC

(Bloomberg) -- China’s central bank’s plan to borrow bonds may slow but won’t quash their rally, as the fundamental reasons driving demand for debt are unlikely to reverse, according to analysts.

Most Read from Bloomberg

• US Allies Allege China Is Developing Attack Drones for Russia

• China Can End Russia’s War in Ukraine With One Phone Call, Finland Says

• Democrats Weigh Mid-July Vote to Formally Tap Biden as Nominee

• Hurricane Beryl Roars Toward Jamaica on Destructive Path

• Biden Plummets in Leaked Democratic Polling Memo, Puck Says

The impact of the People’s Bank of China move may instead be to put a floor on yields and send them into a range, they said. Benchmark yields rebounded from a record low Monday after the PBOC said it would borrow government bonds from primary dealers, a sign it may be contemplating selling securities to cool down a hot bond market.

“As the macro logic is still stabilizing growth and easing monetary policy, the simple reversal of the bond market doesn’t exist, as the possibility of rate cuts is still there,” said Sun Binbin, chief analyst of fixed-income research at Tianfeng Securities. “The overall trend of rates declining hasn’t changed.”

The PBOC has been pushing back against China’s bond rally for months and hinted it may sell some of its own holdings to cool the advance in May. The idea of it trading bonds as a potential tool came to the market’s attention via an old speech by President Xi Jinping, although the operations are also seen as a longer-term plan for better liquidity management in the financial system.

Chinese sovereign bonds have gotten a boost from pessimism toward the world’s second-largest economy and expectations for further interest-rate cuts. The lack of alternative investment opportunities for onshore investors has also driven them into bonds as haven assets.

The central bank’s move toward borrowing notes “is not purely intervention, but still some sort of caring,” Tianfeng’s Sun said.

Huaxi Securities analysts led by Liu Yu said investors may now trade defensively in the short-term, using June’s yield levels as an anchor. Monday’s jump in yields may be a “one-time emotional release,” they wrote in a note, though longer-tenor yields may rebound some 10 basis points.

China’s 10-year yield traded at 2.24% on Tuesday, up from an all-time low of 2.18% on Monday, according to data compiled by Bloomberg that goes back to 2002. A newspaper backed by the PBOC said last month the benchmark should be around 2.5% to 3%.

PBOC Signals Possible Government Bond Sales to Cool Market Rally

For Zhou Guannan, an analyst at Huachuang Securities, the PBOC statement suggested it is eyeing 2.20% as a soft red line for the benchmark note and 2.40% for its 30-year equivalent.

The 30-year bond saw a closing low of 2.42% in April and stood around 2.46% on Tuesday.

“For the bond market, long-end yields face retracement pressure in the short term,” said Ming Ming, chief economist at Citic Securities. “In an environment where the lack of lucrative assets is still unchanged,” the attractiveness of medium- to short-tenor bonds may increase.

(Adds further context on bond yields in eighth paragraph.)

Most Read from Bloomberg Businessweek

• China’s Investment Bankers Join the Communist Party as Morale (and Paychecks) Shrink

• Online Shopping Warehouses Are Reshaping Rural America

• The Fried Chicken Sandwich Wars Are More Cutthroat Than Ever Before

• For Tesla, a Smaller Drop in Sales Is Something to Celebrate

• Dragons and Sex Are Now a $610 Million Business Sweeping Publishing

©2024 Bloomberg L.P.