Chinese government bonds continued their recovery following an increase in short-term funding from the country’s central bank. The yield on the benchmark 10-year government bond fell by 3 basis points to 1.84%, marking consecutive days of declines. Futures on the 30-year bond surged by as much as 1%, the largest increase since late December.
This upward movement followed the People’s Bank of China (PBOC) injecting a combined 973.2 billion yuan ($134.6 billion) into the market via short-term policy loans over the last days. This move ended a two-week period of tightening and marked the longest streak of liquidity injections since late January.
The cash infusion reflects growing concerns among officials over risks from a recent bond market rout, triggered by the PBOC’s efforts to defend the yuan and a surge in Chinese stock prices. As the dollar retreats globally, Beijing now has room to focus on reducing borrowing costs in an effort to meet its ambitious economic growth target for the year and assist investors in managing the sharp rise in debt issuance.
Analysts at Huaxi Securities, led by Liu Yu, noted that the PBOC’s continued liquidity injections will help prevent the bond sell-off from escalating further, boosting confidence in the bond market. “With the support signal, the bond market has the potential to re-enter a moderately bullish phase,” they wrote in a recent note.
Earlier this year, China’s money market faced significant pressure as the PBOC allowed a liquidity squeeze to drive short-term funding costs to the highest levels since June. Additionally, the central bank has not cut interest rates or adjusted banks’ required reserve ratios since September.
Meanwhile, the Chinese government’s annual supply of new bonds is expected to rise to 11.86 trillion yuan this year, after officials raised the general budget deficit target to around 4% of GDP—its highest level in more than 30 years.
Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong, stated that the PBOC is likely to feel more comfortable with the yuan following the recent easing of depreciation pressures, which could reduce the need for tight liquidity management.
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