The People’s Bank of China said it would gradually increase the buying and selling of treasury bonds in its open-market operations in its latest quarterly monetary policy report on Friday.
It also mandated stress tests for financial institutions’ bond asset exposure to mitigate interest rate risk, and pointed out some bonds and their by-products had been leveraged for “obviously higher” yields than their underlying assets, another source of potential risk.
“This series of warnings is of particular concern,” wrote GF Securities analyst Zhong Linnan in a research note, adding the present unilateral expectations of interest rate cuts could change dramatically with PBOC’s operations, regulations and outlook on expectation management.
In a Sunday report, Guosheng Securities said the call for a “risk test” reflects the central bank’s concern over rapidly falling interest rates, indicating a shift from “anticipation guidance” to “field operation.” This change could lead to increased short-term volatility in the bond market.
As of Monday at close of business, the 10-year government bond yield stood at 2.2135 per cent, up 6.25 basis points from the previous trading day.
“We need to strengthen countercyclical support, boost the economy’s sustained movement towards a positive trend, and create a favourable monetary and financial environment to achieve our annual economic and social targets,” it said.
In its statement, the PBOC said it will advance market-based interest rate formation, explore narrowing the interest rate corridor and encourage financial institutions to enhance their independent pricing capabilities, leading to a steady reduction in the costs of corporate financing and residential credit.
“We will also prevent capital idleness and ensure that financial institutions actively identify and fulfil effective credit demands,” it said.