China’s bull run on bonds triggers fresh warning from central bank amid record-low yields

Institutions are being warned as bearish investor sentiment, and an expectation of lower interest rates, continue to make the bond market a sought-after haven

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The People’s Bank of China has warned some financial institutions to be more mindful of interest rate risks. Photo: Reuters

Published: 7:30pm, 18 Dec 2024

With the yields of Chinese government bonds slipping to record lows, China’s central bank has issued a stern warning to financial organisations to step up compliance efforts and mitigate risks, amid an intensified crackdown on bond-trading irregularities.

Overly aggressive bond trading will not be tolerated, the People’s Bank of China said in a meeting on Wednesday, warning some institutions to be more mindful of interest rate risks, according to the Financial News, a publication under the central bank.

Stressing that the PBOC was taking a “zero tolerance” approach, the report said other requirements include improving investment-research capabilities and making more prudent bond investments while complying with the law.

The admonition was the latest in a series of warnings and actions taken in recent months. But China’s 10-year bond yield has continued its extended slump, hitting a record low this month as investors scramble for safe-haven options such as ultra-long-term bonds. Meanwhile, China’s policymakers are engaged in a concerted effort to cool China’s bond-market rally amid the nation’s economic slowdown.

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Wild swings in Hong Kong and mainland China stock markets

“It is possible to see intervention to arrest the fall in bond yields following such stern verbal warnings, but it may not change the structural trend unless there is a clear sign of economic recovery,” said Gary Ng, senior economist for Asia-Pacific thematic research at French investment bank Natixis in Hong Kong.

“The bearish investors’ sentiment, and the expectation of lower interest rates, have continued to attract money into the bond market. However, regulators may be concerned that quick moves can also pose financial risks,” Ng said.