tl;dr
China’s central bank injected 601.8 billion yuan ($84 billion) into the financial system to halt a rapid selloff in 30-year government bonds, which had been rising in yield and threatening market stability. The selloff stems from increased redemption pressures on bond funds amid falling long-term bo...
China’s central bank made a dramatic move on Friday, injecting 601.8 billion yuan (around $84 billion) into the financial system via reverse repurchase agreements. This marked the largest daily liquidity boost since January, aimed at halting a rapid bond selloff that threatened to destabilize the market. For a week, China’s 30-year government bond yields had been rising continuously, but this intervention brought the surge to a halt, pausing futures tied to the same bonds and staunching a selloff that had dragged on for over two years.
The crisis stems from mounting redemption pressures on bond funds, which have intensified as longer-term bond prices fell. Investor confidence has been shaken by factors including a fragile U.S.-China trade truce and China's campaign against deflation, eroding bond appeal. Data showed a spike in fixed-income fund redemptions on Thursday, reaching levels unseen since October. As bond holdings in funds nearly doubled over two years, the potential for large outflows has escalated risk.
Market analysts from Huatai Securities cautioned that redemption pressures often exacerbate without intervention. If investors persist in pulling out, funds must offload more bonds, driving prices down and triggering further exits. The People’s Bank of China faces the critical task of sustaining liquidity injections, either through open market operations or direct bond purchases, to prevent a downward spiral. An alternative approach to stem losses could be to temper stock market gains, which are currently attracting capital fleeing bonds.
The outflow has been swift and sizable: local funds withdrew 120 billion yuan from bonds within three trading days through Thursday, signaling a full-scale exit rather than a mere slowdown. Reports indicated that over 90% of China’s 3,182 mutual bond funds linked to medium- and long-term debt suffered losses from Monday to Wednesday, underscoring widespread distress.
Meanwhile, in the primary bond market, the finance ministry’s attempt to sell 30-year special sovereign bonds on Thursday revealed buyers’ demand for higher returns, with yields reaching 1.97%, the highest since March. This loss of confidence is driving borrowing costs up across the board. The credit sector is also feeling the pinch; yields on AAA-rated 3-year corporate bonds increased by 11 basis points this week, marking the largest weekly rise since February. Together, these developments highlight a precarious balancing act as China’s financial authorities strive to stabilize bond markets amid growing economic uncertainties.