(Bloomberg) — Chinese government bonds extended a recovery after the country’s central bank boosted short-term funding support.
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Yields on the benchmark 10-year note fell 3 basis points to 1.84%, marking a third consecutive day of declines. Futures on the 30-year paper rose as much as 1%, the most since late December.
The gains came after the People’s Bank of China has added a combined 973.2 billion yuan ($134.6 billion) via short-term policy loans on a net basis in the last four days, ending two weeks of draining and marking the longest streak of injections since late January.
The supply of new cash signals growing official concerns about risks from the recent bond rout that resulted from both the PBOC’s efforts to defend the yuan and a rally in Chinese stocks. Given the dollar’s recent global retreat, Beijing can afford to refocus on lowering borrowing costs so as to achieve its ambitious annual economic growth target and help investors absorb a spike in debt issuance.
“PBOC’s continued injections will prevent the debt selloff from worsening and help recover confidence in bonds,” analysts led by Liu Yu at Huaxi Securities wrote in a note. “With the support signal, the bond market has the potential to re-enter a moderately bullish phase.”
China’s money market was under pressure earlier this year, after the PBOC allowed a cash crunch to push key short-term funding costs to surge to the highest since June. The central bank also has refrained from lowering interest rates or banks’ required reserve ratio since September.
Meantime, China’s annual supply of new government bonds is set to increase to 11.86 trillion yuan this year, after officials raised the general budget deficit target to around 4% of GDP, the highest level in more than three decades.
The PBOC “should become more comfortable with the yuan — and thus less need to keep liquidity tighter — after the recent decline of depreciation pressures,” said Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong.
–With assistance from Qizi Sun.
(Updates with more comments and details)
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