China to borrow treasury bonds from market traders to keep yields stable

China's central bank could use secondary bond trade to improve curve and keep long-term yields above benchmark thresholds

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People’s Bank of China governor Pan Gongsheng has said the central bank must take action to stem risk, which may include trading bonds on the secondary market. Photo: Bloomberg

Published: 5:12pm, 1 Jul 2024Updated: 9:04am, 2 Jul 2024

China’s central bank said on Monday that it will borrow treasury bonds from some open market traders soon, in a move it said would help “maintain the stable operations of the bond market”.

The decision was made after reviews and assessment, the People’s Bank of China said in an online statement without elaborating on bond value or maturity.

The decision, unusual for the bank, came as Beijing has resorted to ultra-long treasury bonds as a way to finance the country’s construction projects. The issuances have come in batches with 30-year and 50-year terms.

In keeping with instructions from President Xi Jinping at October's central financial work conference, the bank is poised to use the treasury bond trade in the secondary market as a tool to adjust market liquidity and improve China’s yield curve, a graphical representation of the interest rates on debt for a range of maturities.

Over the past three months, the PBOC expressed worry over the falling yield of ultra-long-term treasury bonds, saying the trend is not in line with the country’s growth potential.

It’s kind of an innovative way to inject market liquidity

Liu Shengjun

On Thursday, the yield of China’s 50-year government bond dropped below 2.5 per cent, a minimal threshold the monetary authority hinted it would have to defend, including by selling treasury bonds.