Government-Bond Selloff Continues Amid Tightening Concerns

Chinese government-bond yields Wednesday climbed above 4% again, indicating a continued bond-market rout after Beijing set sweeping new guidelines to regulate asset management products.

The yield on China’s benchmark 10-year bond settled at 3.993% after topping 4% in earlier trading. Yields on the bonds, which move inversely to prices, briefly hit 4% last week for the first time since October 2014.

Yields on quasi-sovereign issuers even exceeded 5%. The yield on China Development Bank 10-year notes touched 4.91%, and the yield on Agricultural Development Bank of China 10-year notes reached 5.05%.

Analysts said the continued selloff in China’s bond market is fueled by concerns over regulatory tightening after the central bank issued guidelines to more strictly regulate asset management businesses last Friday.

The draft guidelines will unify rules covering asset management products issued by all types of financial institutions and will set leverage ceilings on such products, aiming to curb asset price bubbles and rein in shadow banking activity, according to a statement issued by the People’s Bank of China.

The new guidelines could affect more than 10 trillion yuan ($1.51 trillion) of government bonds held by financial institutions, said Xu Hanfei, chief fixed-income analyst at China Merchants Securities.

But some bond market watchers said the guidelines were just a trigger for the rout as more fundamental reasons grow out of banks’ liquidity drain and growing bearish sentiment among investors.

The yields on policy-bank bonds rose faster than those of government bonds, resulting in the biggest spread since 2015.

The bigger drop in prices of policy-bank bonds was mostly triggered by stop-loss orders, said Wang Junyu at Shanghai Pudong Development Bank.

Wang said he expected government-bond yields to continue rising in the fourth quarter as a result of large debt auctions and weak demand.

Meanwhile, the central bank refrained from injecting extra cash into the financial system. The People’s Bank of China pumped in 190 billion yuan ($28.7 billion) through reverse-repurchase agreements on Wednesday, only enough to cover the amount of maturing agreements.

A trader at a bank fixed-income department said the market is waiting for any positive news or a big buy order to stop the declines. Otherwise, the bearish sentiment will probably persist, the trader said.