BEIJING/SHANGHAI (Reuters) – Investments in governments bonds are not risk-free, a Chinese central bank official said on Tuesday, warning of a potential market bubble and resulting turbulence if bond yields departed from economic fundamentals.
Fast falling Chinese bond yields have been complicating Beijing’s efforts to stabilise a weakening yuan and the People’s Bank of China suspended treasury bond purchases in January, a move seen by investors as an attempt to stop yields from testing new record lows.
“If long-term government bond yields cannot accurately reflect economic fundamentals, or if there are big changes in supply and demand … Considering amplifying effect that some institutions have financial leverage, a spiral effect could be formed by redemptions, greater losses will occur in the short term,” Zou Lan, head of the central bank’s monetary policy department, told a news briefing in Beijing.
The central bank has intensified macro-prudential management, issued risk warnings, suspended treasury bond purchases and switched to other liquidity tools to avoid “exacerbating supply-demand tensions and market fluctuations,” Zou said.
However, Zou’s comments had little impact on the trades, with China’s 10-year and 30-year government bond yields falling as much as 3.25 basis points (bps) and 4 bps, respectively, on Tuesday.
Against the backdrop of a global bond sell-off, the trend could further widen the gap between Chinese and U.S. government debt yields, adding more unwelcome pressure on the yuan, traders and analysts said.
Addressing the same press conference, Xuan Changneng, deputy governor of the PBOC, reiterated that China will continue to take steps to stabilise the yuan at reasonable and balanced levels.
“The goal of maintaining the basic stability of the yuan exchange rate will not change,” Xuan said.
“We have the confidence, conditions and ability to resolutely achieve the goal … will resolutely correct market pro-cyclical behaviours, resolutely deal with behaviours that disrupt market order, resolutely prevent the risk of exchange rate overshooting.”
Xuan said that China will also adjust and improve policy implementation force and pace to hit its full-year economic and social development targets.