China Sovereign Bonds Slump as Wealth Curbs Seen Hitting Demand

Updated on
  • PBOC will step up monitoring of lenders’ WMPs: Financial News
  • Move to reduce investment in debt, money market, SocGen says

China’s government bonds extended declines, pushing the 10-year yield to a 16-month high, on speculation policy makers’ efforts to clamp down on wealth-management products will exacerbate a debt selloff.

The yield on sovereign debt due November 2026 climbed 10 basis points to 3.5 percent, according to National Interbank Funding Center prices. That’s the highest for the similar-maturity benchmark since August 2015, ChinaBond data show. Bond futures plunged by a record last week, the 10-year yield surged by the most in two years and interest-rate swaps reached a 20-month high.

The People’s Bank of China will include wealth-management products held off lenders’ balance sheets in its framework for gauging risks to the financial system, according to a newspaper controlled by the monetary authority. Rapid growth of the products can pose risks to the economy and it is necessary to step up monitoring, the Financial News reported Monday, citing a PBOC official it didn’t name.

"Inclusion of WMPs in the macro prudential assessment will impact rates directly through reduced investment in bond and money market instruments as underlying assets to WMPs," Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale SA, wrote in a note Tuesday. "These reductions in demand are unlikely to be matched by increases from direct client demand, given that around half of WMP buyers being individuals."

The size of such products more than doubled in two years to a record 26.3 trillion yuan ($3.78 trillion) as of June 30 as savers sought returns higher than deposit rates. Of this amount, about 56 percent is invested in the bond and money markets, according to data from the China Banking Wealth Management Registration System.

The Ministry of Finance downsized its bond offerings, selling 16 billion yuan ($2.3 billion) of debt at each of its three- and seven-year sales on Wednesday, according to statements on the China Central Depository & Clearing Co.’s website. The amounts were reduced from 28 billion yuan announced earlier.

China’s record bull run in bonds was brought to an abrupt halt last week with tighter liquidity triggering a selloff that sparked a chain reaction among banks, funds and brokerages as losses spread. Much of the risk stems from a strategy favored by investment firms managing bank wealth products, which involves the borrowing of short-term funds to invest in debt.

A year of low money-market rates made the trade lucrative, until the People’s Bank of China started tightening funding in August in an attempt to trim excessive leverage in the financial system. Lenders began asking for their money back and cut off the supply of cash, forcing the investment firms to reduce their holdings and hedge losses with derivatives.

— With assistance by Tian Chen

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