PBOC Governor Pan Gongsheng was previously head of China’s foreign currency regulator, so “it appears to be the same playbook,” said a Shanghai-based fund manager.
In another warning shot to bond buyers, the PBOC ceased providing cash through open market operations on Wednesday for the first time since 2020, contributing to the biggest weekly cash withdrawal in four months in support of yields.
Dealing a further blow to market sentiment, China’s interbank watchdog said it would investigate four rural commercial banks for suspected bond market manipulation, and would report several misbehaving financial institutions to the PBOC for penalty.
The PBOC did not reply to a Reuters request for comment.
“SWORD OF DAMOCLES”
To be sure, the flurry of measures have made some investors cautious. Both China’s 10-year and 30-year treasury futures posted their first weekly fall in a month.
“Taking all factors into account, it would be prudent to exercise additional caution regarding China duration risk,” Kiyong Seong, lead Asia macro strategist at Societe Generale said, referring to the risk of holding long-dated bonds.
“While the scale of any selloff in China bonds may not be substantial in the medium and long term due to the fragile growth momentum in China, chasing duration returns in China does not seem appropriate in our view.”
Tan Yiming, analyst at Minsheng Securities, wrote in a note: “The sword of Damocles is falling.”
But in a so-called “asset famine” environment where high-yielding assets are in short supply, “the bond bull remains alive,” Tan said.
The Shanghai-based fund manager said there’s no reason to throw in the towel without seeing clear signs of economic improvement, and his strategy is to “buy on the dip”.
“You cannot change market direction using technical tools, just as you cannot change the temperature by adjusting the thermometer,” he said.
The PBOC moves could change the tempo of bond price rises, but not the uptrend, he said. “If you hold long enough, you will make money.”
However, rising volatility shows the central bank is at least making some progress in giving investors pause for thought.
Chun Lai Wu, head of Asia Asset Allocation at UBS Global Wealth Management, cautioned that expected support to Chinese bonds from any monetary easing will likely be offset somewhat by stepped-up government bond issuance.
China’s 30-year treasury yield is currently around 2.37 per cent, compared with 3 per cent a year ago.
“Over the long term, we could see the … yield drift higher, maybe towards 2.5 per cent, if indeed we see the economic recovery continue and inflation begin to return.”