China Bond Turmoil Halts as PBOC Soothes Nerves With Injections

Updated on
  • Central bank has added 690 billion yuan so far this week
  • PBOC sending clear signal it wants to calm markets: OCBC

The People's Bank of China in Beijing.

Photographer: Qilai Shen/Bloomberg

China’s bond market moved on from the rough and tumble of recent days, with futures heading for the biggest two-day advance since May and yields declining for the second day in a row.

The turnaround -- which came just as suddenly as a four-day rout that drove the 10-year yield to a three-year high -- follows signs that the central bank is actively trying to calm nerves. The monetary authority’s open-market operations have injected 690 billion yuan ($104 billion) in the past three days, helping ease concerns in a week that has more than 1 trillion yuan of loans coming due.

“The central bank is sending a clear signal that it wants to soothe sentiment after the bond selloff,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "Authorities will adopt a carrot and stick strategy -- they will pump in cash from time to time to prevent panic, but also damp expectations that they would ease monetary policy as deleveraging will still be the main focus."

China’s bonds have borne the brunt of an official deleveraging campaign, with money-market rates surging to multi-year highs. Still, the People’s Bank of China has in recent months been known to step up cash injections in times of liquidity tightness.

The bond market took a dramatic turn for the worse late last week, with sovereign yields surging 20 basis points in the four sessions through Monday amid concern policy makers would toughen the drive to reduce borrowing levels. Comments from the PBOC governor signaling higher-than-expected economic growth and a slide in U.S. Treasuries exacerbated the pressure.

On Wednesday, the most-active 10-year government bond futures climbed 0.3 percent, extending a two-day increase to 0.6 percent, the most in more than five months on a closing basis. The yield on sovereign notes of the same tenor declined two basis points to 3.87 percent in Shanghai, taking a two-day drop to six basis points. The five-year yield retreated three basis points to 3.90 percent.

The Ministry of Finance sold 10-year bonds at a yield of 3.82 percent on Wednesday, lower than the median estimate of 3.88 percent in a Bloomberg survey. The bid-to-cover ratio was 4.16, the highest since July, according to a trader who bid at the auction, signaling demand was strong. The ministry sold one-year debt at 3.54 percent, compared with a forecast of 3.52 percent.

"The PBOC will step into any market when there is a sign of a crash or a crisis," said Iris Pang, an economist for Greater China at ING Groep NV in Hong Kong. "But, that may mean the central bank could be tied up by these hiccups, thereby lengthening the deleveraging progress."

— With assistance by Tian Chen, and Helen Sun

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