(Bloomberg) — China bond futures pushed higher as traders took a dovish interpretation from Beijing’s latest salvo in its battle to cool down a record rally.
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A senior official at a Chinese regulatory body said officials will keep cracking down on speculative trading in longer-dated bonds, though suggested they are not seeking to control yields as some suspected.
China will step up investigation and punishment of illegal activities in the bond market, in a bid to prevent financial risks and maintain market order, several major official newspapers reported on Thursday, citing interviews with Xu Zhong, deputy secretary general of the National Association of Financial Market Institutional Investors, or NAFMII.
However, he said the People’s Bank of China has not set a target range for long-term government bonds and financial institutions shouldn’t go to the opposite extremes of halting trading completely. The reports implied that China’s efforts of stemming risks in the bond market don’t necessarily contradict with a view that further interest rate cuts to boost the economy lie ahead.
Xu’s key purpose “is to clarify the PBOC’s stance and purpose with market participants, given the confusion created by recent actions,” said Becky Liu, head of China macro strategy at Standard Chartered Bank. “This doesn’t change our view that China rates are still grinding further lower.”
The comments are the latest in Beijing’s tussle with bond speculators through measures such as gathering financial institutions for meetings and probing the bond trading of some small rural lenders. Officials have been seeking to limit risks at some firms who have been buying up government bonds, wary of the 2023 collapse of Silicon Valley Bank, which piled into US Treasuries before a market reversal.
The measures helped pull yields off record lows but bond buyers returned in recent days amid bets the PBOC will have to cut rates further to support growth.
Both 10- and 30-year bond futures pushed higher in early trading Thursday. Benchmark yields were little changed, having edged lower late Wednesday after the release of the comments.
Speculation and illicit activities have emerged during the rapid drop of long-term yields this year, according to Xu. Some small financial institutions rely on bond investments for over 30% of their revenue, with the percentage for some institutions even exceeding 50%, the reports suggested. Some institutions were found lending out bond trading accounts to private hedge funds and manipulating bond prices through cash bond and futures trading.
“While there should be some speculative activity, the fundamental drivers of funds to bonds are driven by investors seeking safe yield amid low deposit rates and weak sentiment,” said Lynn Song, chief Greater China economist at ING Bank in Hong Kong.
–With assistance from Yujing Liu.
(Updates with comments and market detail.)
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