China’s government bond yields have been on a continuous decline this year, with the 10-year government bond yield hitting new lows in December. On Wednesday (December 18), the People’s Bank of China (PBOC) summoned some financial institutions in an attempt to halt the downward trend of bond yields. However, analysts point out that due to the sustained economic slowdown in China and the implementation of loose monetary policies, it is challenging for the central bank to prevent the long-term decline in bond yields.
According to a report from the Financial Times under the supervision of the PBOC, on Wednesday morning, the PBOC convened some aggressively trading financial institutions in the current bond market situation, urging them to pay attention to their interest rate risks, enhance research capabilities, and strengthen the prudence of bond investments. The summoned institutions include banks, securities firms, insurance asset management companies, wealth management subsidiaries, funds, trusts, and others.
Starting from the end of November, Chinese government bond yields have been declining rapidly. As of 10 a.m. on Wednesday, the 5-year government bond yield dropped by 2.5 basis points to 1.5%, and the 10-year government bond yield fell by 0.6 basis points to 1.714%, reaching new lows for this year.
Government bond yield refers to the ratio of annual income from investing in government bonds to the total investment amount. The government bond yield is usually expressed in percentage (%).
Throughout this year, the yields of the 10-year and 30-year government bonds have decreased by more than 80 basis points. Bloomberg’s analysis indicates that in the first half of the year, the Chinese regulatory authorities attempted to prevent the rapid decline of long-term government bond yields through investigations, statements, and actions against aggressive trading institutions. However, against the backdrop of China’s continuously sluggish economy and credit conditions, the scarcity of assets has driven funds continuously into the bond market, turning every regulation by the authorities into an opportunity for financial institutions to buy in.
Asset scarcity doesn’t mean there are no assets available for investment, but rather that high-yielding quality assets are becoming increasingly scarce. For financial institutions, asset scarcity means that the assets available in the market are not enough to cover the cost of funds.
According to reports from Caixin, in November, public fund houses had already fully invested in various bonds with 1.16 trillion yuan, and in December’s market, funds were the primary driver of the accelerated bond market, with insurance companies and banks also entering the long-term government bond market. Public funds mainly include bank wealth management, mutual funds, securities asset management, and trust plans.
Despite repeated warnings from the central bank about the risks of a bond market bubble, due to interest rate cuts on deposits and the Chinese government’s commitment to further easing monetary policies, the bond market remains hot, as reported by Reuters.
Ivan Shi, the Research Director of Z-Ben Advisors, said, “The bond market’s bull run (inverse relationship with bond yields) and the intensified regulatory efforts to lower deposit rates have increased the attractiveness of bond funds to various investors.”
According to Z-Ben’s statistics, the total funds raised for new bond funds since the beginning of the year have amounted to 883.9 billion yuan. Bond funds specifically invest in bonds and seek stable returns by pooling funds from numerous investors for portfolio investment in securities.
The Wall Street Journal stated that the recent trend in the Chinese bond market is shouting “stagnation” for the Chinese economy.
Since the end of September, the Chinese government introduced a package of “incremental policy tools”, yet a significant portion of the support has gone to local governments, barely benefiting households, stimulating demand, or curbing the vicious cycle caused by spiraling deflation.
The hope for economic support in China is placed on state-owned banks, insurance companies, and funds, but these institutions are the main buyers of government bonds. They prefer to hedge their money in the bond market rather than providing funding for commercial projects or allocating money elsewhere.
Regarding the stagnation in commercial and consumer spending, a Chinese investment banker said, “With demand so sluggish now, what is there to invest in?”
With news spreading in the market about the central bank summoning financial institutions, bond yields of various maturities rose on Wednesday noon. As of 15:51 Beijing time, the 10-year government bond yield rose by 2 basis points to 1.75%, and the 30-year current government bond yield surged by over 4 basis points to around 2%. However, analysts believe that the central bank’s warning may not be able to deter the long-term downward trend of bond yields.
Kiyong Seong, a macro strategist at Societe Generale, said that the PBOC’s warning may find it difficult to change the long-term trend of (decreasing) bond yields.
Chang Jiantai, Chief Asia Forex Analyst at Mizuho Bank, stated that the impact of the window guidance (PBOC warning to financial institutions) is expected to be temporary unless economic data reflects that loose monetary policy has stimulated economic recovery.
Once the economy recovers, and there are more high-yielding quality assets available, funds will flow from the bond market to these assets, leading to a decline in bond prices and an increase in bond yields.