Markets watch PBOC after China’s bond market selloff

Chinese government bonds snapped a weeklong slide after a selloff lifted benchmark yields to the highest level in nine months, fueling bets that the central bank is nearing a return to buying debt.

Traders said the late-week rebound followed growing talk that the People’s Bank of China could step back into the market after halting purchases in January. Expectations for support have risen as a sharp rally in Chinese stocks has drawn money away from bonds.

“The bond market was stabilizing due to discussions that the PBOC is likely to restart bond transactions, potentially in five-year notes,” said Zhaopeng Xing, a senior China economist at Australia & New Zealand Banking Group Ltd. in Shanghai. He said the buying could begin as soon as this month.

A restart of central bank purchases would aim to shore up confidence among bondholders as the shift into equities has reduced demand for securities that offer relatively low yields. Traders are watching for any PBOC move that would show officials are prepared to curb the jump in yields that is pushing up government borrowing costs.

Slide adds 25 basis points to 10-year yields

The slide since late June had added about 25 basis points to the benchmark 10-year yield before easing late last week. The drop in prices accelerated early last week after a proposal to change mutual fund fees raised concerns that it could discourage bond allocations.

Last year, authorities rolled out bond-market operations as an added lever to fine-tune system liquidity. The PBOC made net purchases for five straight months before pausing in January. The central bank usually releases monthly results at the start of the following month. Expectations for renewed buying are building, the Securities Times reported Friday, citing analyst interviews.

Some economists doubt the central bank is ready to act. The PBOC may hold off because the bond selloff may have further to run, said Lynn Song, chief Greater China economist at ING Bank NV in Hong Kong. He said even a rise in 10-year yields to a 2%–3% range would be “completely reasonable,” compared with the current level of less than 1.9%.

Past episodes show how speculation can miss the mark. According to Bloomberg, in June, purchases of short-dated government bonds by state banks sparked talk that the PBOC was behind the buying, but monthly transaction data later showed that was not the case.

Yields are now at their highest since November as investors rotate into equities on hopes the world’s second-largest economy can move past deflation pressures.

Last week Wednesday, yields on 30-year Chinese government bonds rose 0.08 percentage points to 2.21%. The 10-year benchmark added three basis points to 1.82%, its highest level since the run-up to US President Donald Trump’s “liberation day” tariff announcement in April—an episode that spurred investors to pull back from Chinese risk assets.

Bond prices fall when yields rise. As of Monday, the 30-year yield is about 2.19% and the 10-year is around 1.87%.

Bond yields rose despite drop in August consumer prices

Some analysts pointed to details that suggest the campaign against deflation is gaining traction. Factory-gate prices, which have dropped every month since October 2022, contracted by less than expected, while core consumer inflation and producer price inflation for upstream sectors such as materials increased.

“Anti-involution has started to ease deflationary pressures,” Barclays analysts said, citing Beijing’s drive to reduce wasteful overproduction.

“We expect a firm pick-up of CPI towards year end after some near-term volatility, and upstream reflation to continue for PPI,” Citi analysts said.

China is also part of a broader global selloff in long-dated government bonds that has coincided with a surge in gold prices, reflecting investor worries about inflation and widening fiscal deficits worldwide. “It’s a sign of growing long-term global inflationary expectations,” said Albert Saporta, group chief executive of GAM Holding. “Thirty-year rates are going up everywhere.”

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