Bond investors have never been so pessimistic about the world’s second-largest economy, with some now piling into bets on a deflationary spiral. The contrast with the US is stark, where Treasury yields are climbing higher by the day, powered by seemingly unstoppable economic growth stateside.
That’s a dynamic that favors the dollar and the yuan has fallen to trade near the weak edge of its permitted band versus the US currency, despite efforts by authorities to stabilize the exchange rate.
“This marks another move by the PBOC to support the yuan FX rate,” said Serena Zhou, an economist with Mizuho Securities Asia Ltd.
On Friday, the PBOC issued yet another daily reference rate for the managed currency that was significantly stronger than the market’s forecast. It also plans to issue a record amount of bills in the Hong Kong this month to soak up liquidity and support the yuan.
Bond Transactions
The PBOC has purchased a net 1 trillion yuan of sovereign notes for five straight months through December, after starting regular bond transactions with primary dealers in August.
China government bond yields rose across the curve following the statement, with five-year rate climbing eight basis points and 10-year rate gaining four basis points to 1.675%. The offshore yuan edged 0.1% higher.
“We think this suspension is unlikely to last as Chinese policymakers try to guide a moderate rise in prices and aim for accommodative monetary policy to support growth,” said Mizuho’s Zhou. “It is possible going forward that the PBOC will keep their bond repurchases focusing on short-end Chinese government bonds to guide bank deposit rates lower, rather than CGBs across the whole curve.”
