Investments in Government Bonds

BEIJING/SHANGHAI (Reuters) – Investments in government bonds are not risk-free, as warned by a Chinese central bank official, who highlighted the likelihood of a market bubble if bond yields deviate from economic fundamentals.

Fast-falling Chinese bond yields complicate Beijing’s attempts to stabilize a weakening yuan. The People’s Bank of China (PBOC) suspended treasury bond purchases in January to prevent yields from reaching new record lows.

“If long-term government bond yields cannot accurately reflect economic fundamentals, or if there are significant changes in supply and demand… Considering the amplifying effect of financial leverage from some institutions, a spiral effect could emerge through redemptions, leading to greater losses in the short term,” stated Zou Lan, head of the PBOC’s monetary policy department, during a news briefing in Beijing.

To avoid worsening supply-demand tensions and market fluctuations, the central bank has intensified macro-prudential management, issued risk warnings, and switched to other liquidity tools.

Despite Zou’s comments, trading saw China’s 10-year and 30-year government bond yields decline by 3.25 basis points and 4 basis points, respectively.

In the context of a global bond sell-off, the ongoing trend may further widen the gap between Chinese and U.S. government debt yields, increasing pressure on the yuan, according to traders and analysts.

At the same news conference, Xuan Changneng, deputy governor of the PBOC, reiterated that China will continue steps to stabilize the yuan at reasonable levels.

“The goal of maintaining the basic stability of the yuan exchange rate will remain unchanged,” Xuan stated.

“We have the confidence, conditions, and ability to achieve this goal… and will correct market pro-cyclical behaviors, address disruptions to market order, and prevent exchange rate overshooting risks.”

Xuan also noted that China will adjust and improve policy implementation to meet its full-year economic and social development targets.