Global: China’s Central Bank Strategizes to Moderate Prolonged Bond Rally

China’s central bank has positioned itself with hundreds of billions of yuan worth of bonds to borrow and plans to sell them based on market conditions. The People’s Bank of China (PBOC) on Friday informed that this strategy is part of a broader effort to moderate the powerful bond rally currently underway.

The PBOC will borrow medium- and long-term bonds on an open-ended, unsecured basis and will sell them depending on market conditions. The bank has secured agreements with several major financial institutions to facilitate this bond borrowing.

This announcement comes at a time when China’s sovereign bonds have shown strong performance this year, with yields reaching record lows due to a shaky economy and volatile stock markets driving savers towards fixed-income investments. Consequently, treasury bond futures across China fell on Friday, while bond yields, which move inversely to prices, increased.

Ming Ming, chief economist at CITIC Securities, noted that these comments provide further clarity on the central bank’s borrowing and subsequent selling of treasury bonds. “With the size of the treasury bonds at the central bank’s disposal reaching hundreds of billions of yuan, a single day of concentrated selling will have a significant impact on the market,” he said.

Earlier this week, the PBOC stated it would borrow treasury bonds from some primary dealers soon, outlining a plan analysts believe aims to stabilize falling domestic interest rates. Borrowing these treasury bonds sets the stage for possible sales, introducing a new tool for the PBOC to manage credit flow and market yields.

Julian Evans-Pritchard, head of China economics at Capital Economics, commented that without broader monetary tightening, which seems unlikely, the PBOC’s best outcome might be to engineer a short-term pause in the bond rally.

PBOC Governor Pan Gongsheng hinted at the Lujiazui Forum last month that the central bank might soon start trading in the secondary bond market. In May, the PBOC stated it would sell low-risk debt, including government bonds, as needed while closely monitoring bond market changes and potential risks.