China bond slump fuels speculation PBOC will resume debt buying

Expectations of central bank support have been building as a surge in Chinese stocks has weighed on the debt market

The Chinese bond sell-off that drove benchmark yields to the highest level in nine months last week is spurring speculation that the central bank is moving closer to restarting debt purchases.

Bonds snapped their declines late last week, with traders saying the recovery was helped by optimism that the People’s Bank of China (PBOC) was about to step back into the market after suspending purchases in January. Expectations of central bank support have been building as a surge in Chinese stocks has weighed on the debt market.

“The bond market was stabilising 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 in Shanghai. The purchases may begin as soon as this month, he said.

A restart of the central bank’s debt purchase would go a long way to restore confidence among bond investors, as the rotation into stocks has sapped demand for the relatively low yields on debt. Traders are closely watching for any PBOC action to evaluate if the bond sell-off will convince officials to step in to halt the rise in yields that’s pushing up government financing costs.

The slide in bonds, which had pushed benchmark 10-year yields up by about 25 basis points since the end of June, gathered pace early last week due to a proposed overhaul of mutual fund fees that may discourage bond investments.

China introduced bond trading last year as a new monetary policy tool for the PBOC to manage liquidity. The central bank made net purchases for five consecutive months until the pause in January. The PBOC typically releases the monthly operation result at the start of the following month.

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Expectations for renewed buying by the PBOC are rising, the Securities Times reported on Friday, citing interviews with analysts.

‘Completely reasonable’

Not everyone believes the PBOC is about to step back into the market.

The central bank may not be in a hurry to resume bond buying as the sell-off of bonds is probably far from over, said Lynn Song, chief Greater China economist at ING Bank in Hong Kong. Even if 10-year yields rise to a 2 to 3 per cent range that would still be “completely reasonable”, versus the current level of less than 1.9 per cent, he said.

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Expectations that the PBOC was about to intervene have proven wrong before. In June, the buying of short-term government bonds by state banks led to speculation that the PBOC was behind the move, before monthly transaction data showed that was not the case.

A resumption of PBOC bond purchases is most likely to happen in the fourth quarter after the central bank and finance ministry held a meeting this month pledging better fiscal-monetary policy coordination, said Xiaojia Zhi, an economist at Credit Agricole CIB in Hong Kong. BLOOMBERG