China’s central bank, the People’s Bank of China (PBoC), has injected approximately $84 billion (601.8 billion yuan) into the system through reverse repurchase agreements, aiming to mitigate the bond selloff before it disrupts the financial system.
This was the biggest daily liquidity injection since January, as bond yields had been spiking for over a week. Specifically, China’s 30-year government bond yield climbed seven straight days, recording a change on Friday. The surge stopped and futures tied to the same bonds also paused a losing streak that had dragged on for more than two years, so the central bank stepped in because the selloff risk was turning into a full-blown panic.
China’s central bank redemption triggers heavy withdrawals from bond funds
According to reports, this problem has been building for quite some time. Longer-dated bond prices have dropped, and now Chinese authorities are on edge. Two things are draining demand: a shaky US-China trade truce, and China’s effort to fight deflation. The situation has made it harder for bonds to attract traders.
A Thursday data showed that redemption pressure, a key metric tracking fixed-income fund redemptions, spiked and hit its highest level since October. The cause was that bond holdings by funds have nearly doubled in two years, so there’s more at risk when people start pulling out money.
According to Huatai Securities, this kind of pressure doesn’t ease on its own. Analysts led by Zhang Jiqiang warned, “Judging from past experiences, the bond market may see amplified pressure once fund redemptions start.” If investors keep withdrawing, funds will have to sell more bonds, which only pushes prices lower and fuels more exits. They added that unless China’s PBoC keeps pumping liquidity, either through open market operations or buying bonds directly, this could spiral.
Another way to stop the bleeding might be slowing down gains in the stock market, which is where some of the cash is now headed. Now things already seem to be speeding up. Local funds yanked 120 billion yuan out of bonds in just three trading days through Thursday. That’s not a trickle, that’s a full-blown exit. According to a local newspaper, over 90% of China’s 3,182 mutual bond funds tied to medium and long-term debt posted losses between Monday and Wednesday. Meanwhile, in the primary market, the finance ministry tried to sell 30-year special sovereign bonds on Thursday.
The average yield hit 1.97%, the highest since March. Buyers wanted more return to take on that risk, which means confidence is eroding, which pushes borrowing costs higher across the board. That development is also seen in the credit market. The average yield on AAA-rated 3-year corporate bonds jumped 11 basis points this week. That might sound small, but for top-rated bonds, that’s a big move. It’s on track to be the biggest weekly increase since February, according to the ChinaBond index.
