In China’s 10-year treasury bond market, the Ministry of Finance is looking to manage liquidity amid mounting concerns among policymakers that long-term yields have been too low.
The ministry said online on Monday that it planned to sell up to 2.5 billion yuan (US$344 million) worth of two types of 10-year treasury bonds on Tuesday to “improve the liquidity of the secondary market for government bonds, and to improve the government bond yield curve that reflects the relationship between market supply and demand”.
China’s long-term treasury bond market has seen a record rally since last year, sending yields to record lows as investors search for safe-haven assets amid weak confidence in the country’s economic outlook.
The benchmark yield on China’s 10-year treasury bonds traded as high as 2.262 per cent and moderated to trade around 2.251 per cent at noon on Monday, following the finance ministry’s statement.
A scrambling by institutions for government bonds is equivalent to an expectation that interest rates will continue to fall
The statement also came amid a series of warnings by the People’s Bank of China (PBOC) over risks that a bond bubble could burst, which could destabilise financial markets and derail the nation’s uneven economic recovery.
On Saturday, the PBOC-backed Financial News said that financial institutions snapping up Chinese government bonds are basically “disrupting” the economy, citing views from industry analysts.
“A scrambling by institutions for government bonds is equivalent to an expectation that interest rates will continue to fall in the future,” the Financial News said. “It may be that they expect an era of long-term low interest rates like in Japan. This would also increase the capital-outflow pressure.”
The PBOC has expressed a determination to maintain a “normal upward-sloping yield curve” and to correct bond-market risks. Earlier this month, the PBOC also said it had hundreds of billions of yuan worth of bonds at its disposal to borrow, and that it would sell them depending on market conditions.
Since 2017, the Ministry of Finance has conducted regular monthly operations to improve liquidity in the secondary treasury bond market.
However, given the relatively small size of the operation, the moves have been seen by analysts as targeting the supply and demand of specific bonds rather than having to do with changing wider trends in the bond market.
In April, finance ministry officials said they would support the PBOC restarting the trade of treasury bonds in open-market operations, as authorities look to better coordinate the country’s fiscal and monetary policies.
The ministry and central bank have a history of clashing over how to tackle the country’s economic issues. However, Chinese authorities have recently been stressing the need to improve fiscal and monetary policy coordination.
