The rally has pushed yields to record lows, however, and authorities have grown uncomfortable and are starting to push back.
Below are some of the measures the authorities have taken so far with the aim of cooling the market:
WARNINGS
The People’s Bank of China (PBOC) has warned of market risks since March, especially whenever the 30-year treasury yield fell below 2.5%. Yields fall when bond prices rise.
Governor Pan Gongsheng said in June that China must address the issues that led to the collapse of U.S. lender Silicon Valley Bank, which was forced to take large losses on its bond portfolio when short-term rates rose and depositors wanted cash.
He added that the central bank will work on maintaining a normal upward-sloping yield curve, where long-term rates are above short-term rates.
SELLING
The central bank has said that bond trading will be part of its policy programme, and in August it flagged an increase in buying and selling in the open market.
It remains unclear whether the PBOC sold bonds directly, but state banks were heavy sellers of 10-year and 30-year treasuries after yields dropped to record lows early in August, according to traders and data.
DAMPEN DEMAND
Chinese regulators have moved to restrict the duration of new bond funds, in an apparent attempt to curb investment in long-dated treasuries. Fund approval has slowed down, with no new funds being approved over nearly two months to Aug. 13.
In July, the PBOC also cut the collateral requirement for medium-term lending facility (MLF) loans to banks, permitting banks to hold fewer longer-term bonds.
SHAKEDOWN
China’s securities regulator in August ordered some brokerages to inspect their bond trading activities and the PBOC has announced stress tests and increased reporting requirements for institutions’ bond books.
Also in August, a central bank-affiliated newspaper carried warnings that trading accounts must not be borrowed or transferred and regulators announced a probe into the market activity of some regional banks.
The PBOC had surveyed some regional banks on their bond investments in July and March.
EFFECT
Yields have jumped whenever authorities have hinted at market intervention or selling, however they remain near record lows and investors believe it will be difficult to derail the bond price rally while the economy remains in the doldrums.
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