07/05/2024 – 21:29
China’s central bank has signed deals with major dealers to lend hundreds of billions of yuan worth of government bonds, a move analysts say is likely aimed at stabilizing falling long-term bond yields. The People’s Bank of China (PBoC) has started borrowing medium- and long-term bonds from lenders, state media reported on Friday, and now holds hundreds of billions of yuan-denominated securities.
The central bank will lend the bonds without a fixed maturity indefinitely and sell them depending on market conditions, state media added. The move comes after the PBoC said on Monday it will borrow treasury bonds from some primary dealers in the near future, without providing a specific timeline.
“The aim is clearly to bolster the long-term yield curve,” Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a note. Chinese government bonds have been on a prolonged rally as a flight to safety fuels appetite for low-risk assets, pushing yields to multi-year lows. Structural concerns about China’s economy have been a key factor behind the risk-off sentiment, analysts say.
Meanwhile, China’s 30-year government bond futures contract fell 0.2% and its 10-year bond futures contract fell 0.05%, according to Wind data. Whether any central bank intervention leads to a significant turnaround in long-term yields will depend on how much firepower it is willing to deploy.
Given that the PBOC holds less than 5% of China’s total government bond stock, it needs to first borrow from the market to increase its holdings if it wants to influence long-term yields, Evans-Pritchard said. Capital Economics expects China’s 10-year government bond yield to hold steady at around 2.20% through the end of 2025, the economist added.
In addition to seeking to set a floor for government bond yields, analysts believe the central bank will likely use other policy tools to shore up economic stability. The PBoC “may eventually need to cut interest rates to support the economy and boost domestic inflation,” Goldman Sachs analysts wrote in a recent note.
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