China's central bank said on Friday it has suspended treasury bond purchases, triggering a jump in yields and spurring speculation that the move was aimed at defending a falling currency.
The People's Bank of China (PBOC) cited a shortage of bonds in the market as the reason it was halting the purchases, which were part of its operations to ease monetary settings.
But the move coincides with a brutal selloff in other major bond markets around the world and suggests China's central bank is trying to ensure yields at home also rise in tandem, analysts say.
Yields, which move inversely to bond prices, jumped following the central bank's announcement.
China's 30-year treasury yield climbed five basis points in early trade while the 10-year yield rose four basis points. Both hit record lows recently. The yuan too rose slightly.
"One of the key reasons for the depreciation of the yuan is the widened yield gap between China and the U.S., so the central bank is sending a signal to the market that the yield rate is unlikely to fall further," Ken Cheung, chief Asian FX strategist at Mizuho Bank.
The surprise announcement came just months after the PBOC started bond buying as part of measures to improve liquidity management. The central bank said in a statement it would resume bond buying via open market operations "at a proper time depending on supply and demand in the government bond market".
The announcement also comes after warnings from the PBOC about bubble risks in a bond market where long-dated yields have hit successive record lows as investors seek safe assets in a faltering economy and prime for more monetary easing.
Bond prices in China have been on a decade-long rally - one that kicked into a higher gear roughly two years ago as property sector woes and weakness in the stock market triggered a flood of funds flowing into bank deposits and the debt market.
A recent rally in bond prices pushed 30-year yields to as low as 1.8%, reflecting bearish views on the economy, widening China's rate discount to the U.S. and adding depreciation pressure on the yuan. The currency is at 16-month lows and has fallen nearly 5% since peaking in September.
Huang Xuefeng, research director at Shanghai Anfang Private Fund Co in Shanghai, said he expects the downtrend in bond yields to persist as "the market continues to grapple with an asset famine situation" where there's a shortage of good investment opportunities.
With the exchange rate under pressure and yields declining rapidly, the central bank felt the necessity to maintain bond market sentiment, Yu Yangyu at Guangdong Shunde Rural Commercial Bank Co. said in a webinar to investors.
On Friday, Financial News, a PBOC publication, quoted an economist as saying that the market should avoid excessive expectations on monetary policy easing.
