China’s central bank has voiced concerns over the nation’s record-breaking sovereign bond rally, signaling its discomfort with the market’s aggressive pace. In an article published by the PBOC-backed Financial News on Wednesday, sources familiar with the matter reported that the People’s Bank of China (PBOC) is urging financial institutions engaged in “aggressive trading” to pay close attention to potential risks, including those linked to interest rates.
The warning sent ripples through the bond market, with yields on China’s benchmark 10-year government bond rising by as much as four basis points to 1.77%, before settling at a one-basis point increase. Earlier in the week, yields had hit a historic low. Futures on 30-year bonds also saw significant fluctuations, dropping by as much as 1.8% before paring losses to 0.6%, marking the most substantial decline since September.
The bond rally had been fueled by market speculation that the ongoing risk of a trade war with the U.S. might prompt Chinese policymakers to introduce bold monetary measures next year to bolster the economy. As Chinese yields plummeted, fears grew that the country could face a Japanese-style balance sheet recession. At the same time, the widening yield gap between China and the U.S. exerted additional pressure on the Chinese yuan.
Analysts are divided on the future of Chinese bond yields. “While the market may eventually bet on a 40-50 basis point rate cut next year, the regulators likely view the current rally as too fast, too soon,” said Ju Wang, head of Greater China FX & Rates Strategy at BNP Paribas.
The PBOC has previously issued verbal warnings against the unsustainable pace of the bond market’s ascent. It also conducted regulatory checks on bond investors and even sold long-term bonds to temper the surge. Despite these efforts, uneven economic recovery and disappointing growth measures have kept downward pressure on yields.
“After such a relentless bond rally, this may simply be an opportunity for the market to take profits,” remarked Kiyong Seong, a macro strategist at Societe Generale in Hong Kong. “However, the PBOC’s warning is unlikely to change the overall trend.”
Seong forecasts that China’s 10-year bond yield will rise to 2% by the first quarter of 2025, while other analysts remain more optimistic. Firms such as Tianfeng Securities, Zheshang Securities, and Standard Chartered Bank predict yields could drop to between 1.5% and 1.6% by the end of 2025.
Authorities had previously voiced concerns about excessive one-way buying in the bond market, following the collapse of Silicon Valley Bank in 2023, which had heavily invested in U.S. Treasuries before a market reversal. According to BNP’s Wang, the PBOC is likely aiming to prevent a similar situation by curbing excessive long bond positions, in an effort to avoid risks akin to those experienced by Silicon Valley Bank.
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