(Bloomberg) — China’s central bank’s plan to borrow bonds may slow but won’t curb their growth, as the underlying drivers of debt demand are unlikely to return, analysts said.
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The impact of the People’s Bank of China’s move could instead be to put a cap on yields and send them into a range, they said. Benchmark yields recovered from record lows on Monday after the PBOC said it would borrow government bonds from major dealers, a sign it may be considering selling securities to calm a hot bond market.
“As the macro logic is still stabilizing growth and easing monetary policy, the simple reversal of the bond market does not exist, as the possibility of a rate cut is still there,” said Sun Binbin, chief fixed-income research analyst at Tianfeng. Securities. “The general downward trend in rates has not changed.”
The PBOC has held back against a rise in China’s bonds for months and hinted it may sell some of its holdings to moderate the advance in May. The idea of bond trading as a potential tool came to the market’s attention through an old speech by President Xi Jinping, although the operations are also seen as a long-term plan to better manage liquidity in the financial system.
Chinese sovereign bonds have received a boost from pessimism about the world’s second-largest economy and expectations of further interest rate cuts. The lack of alternative investment opportunities for land investors has pushed them to bonds as haven assets.
The central bank’s move to take the notes “is not just intervention, but still a kind of caution,” Tianfeng’s Sun said.
Huaxi Securities analysts led by Liu Yu said investors can now trade defensively in the short term, using June yield levels as an anchor. Monday’s jump in yields could be a “one-time emotional release,” they wrote in a note, although longer-dated yields could recover about 10 basis points.
China’s 10-year yield traded at 2.24% on Tuesday, from a record low of 2.18% on Monday, according to data compiled by Bloomberg going back to 2002.
PBOC Signals Potential Government Bond Sales in Cool Market Rally
For Zhou Guannan, an analyst at Huachuang Securities, the PBOC’s statement suggested it is looking at 2.20% as a soft redline for the benchmark note and 2.40% for its 30-year equivalent.
The 30-year bond saw a low close of 2.42% in April and stood around 2.46% on Tuesday.
“For the bond market, long-term yields face upward pressure in the short term,” said Ming Ming, chief economist at Citic Securities. “In an environment where the lack of profitable assets is still unchanged,” the attractiveness of medium- and short-term bonds may increase.
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