In a bid to curtail risk exposure, the People’s Bank of China (PBOC) has issued directives to select regional banks, advising them to scale back their investments in ultra-long-term bonds.
According to an anonymous source familiar with the matter, urban and rural commercial banks across at least two eastern provinces have received guidance from local branches of the PBOC over the past few weeks. The guidance emphasizes the importance of avoiding excessive holdings of these debt instruments.
Furthermore, regional banks have been encouraged to adjust their portfolios by reallocating investments to shorter-term bonds while also reducing their reliance on bond leverage.
This move by the PBOC signals a concerted effort to temper the soaring prices of long-term government bonds, aligning market valuations more closely with underlying economic trends. Notably, this latest guidance follows similar directives issued to rural banks earlier this month, aimed at curbing investments in specialized long-term debt instruments.
Subsequent to the dissemination of this guidance, the market responded with a sell-off of government bonds, with investors redirecting their funds towards recovering Chinese stocks. Consequently, the yield on 30-year Chinese government bonds surged above 2.59% today, reaching its highest level in over two months. Similarly, the 10-year government bond yield witnessed an increase of more than 0.1 percentage point within the last three days.
The surge in demand for government bonds earlier this year was underpinned by investors’ anticipation of monetary policy easing by the PBOC to stimulate economic growth amidst sluggish demand and a housing crisis.
However, credit expansion in China has moderated in March, with banks extending fewer loans than initially projected. Despite the PBOC’s efforts to maintain accommodative liquidity, traders are finding themselves with increased capital for debt investments. Consequently, local bond yields in China have plummeted to historic lows as investors flock to buy bonds.
Additionally, bonds are benefiting from robust buying by wealth management funds and the sustained demand for safe-haven assets from domestic institutions. The yield on 30-year government bonds has dwindled for the fourth consecutive quarter, nearing its lowest level in two decades, as demand for credit remains subdued and liquidity remains abundant.