Treasury futures in China surged to all-time highs on Thursday, while long-dated rates just missed record lows as investors kept buying bonds despite the central bank’s constant cautions about risk.

According to official figures, the assets of Chinese bond mutual funds surged to a record 6.5 trillion yuan ($894.3 billion) in May, up 40% from the same month last year. The increase is a reflection of how savings in the face of stock market volatility are moving into fixed income products due to reduced deposit rates.

The Chinese bond market’s boom reflects investor gloom towards an economy beset by a real estate bubble, issues with local government debt, and increased geopolitical threats.

Su Gang, the chief investment officer of China Pacific Insurance Group, stated at a conference this week that there is a general consensus among the markets on the future direction of China’s interest rates.

“We’re in the midst of a long cycle that we’ve never experienced before …. and the market lacks confidence.”

The People’s Bank of China (PBOC) is under pressure to rein in its frenetic bond purchase, which it believes might jeopardise financial stability, as a result of the ongoing decrease in rates, which are inversely correlated with bond prices.

This week has seen investors push up bond prices in spite of these cautions.

A record high was reached by China’s 30-year Treasury futures for September delivery, which increased by almost 0.3% on Thursday morning. Additionally, 10-year bond futures also reached new heights.

Ahead of a crucial inflation data and a presidential debate, investors were cautious ahead of Wednesday’s small increases on Wall Street’s major indexes.

In the meantime, the yield on China’s 10-year Treasury note has fallen below the volatile 2.3% mark and is getting close to the 2.205% low from April. Many had worried that if the 30-year rate dropped below 2.5%, the central bank may intervene.

According to recent data, depositors are putting money into bond funds as banks continue to cut savings rates in an effort to save costs.

According to central bank data, Chinese corporate demand deposits fell to a two-year low of 52.98 trillion yuan in May, the worst loss on record, reflecting a 7.1% reduction from a year earlier.

In the meantime, May saw a record increase in bond mutual fund holdings, reaching 6.5 trillion yuan, up 40% from 4.6 trillion yuan the previous year.

As a safe haven asset, Chinese government bonds are becoming increasingly popular among banks, who are hesitant to lend in an unstable economy. Compared to larger banks, smaller banks are more active in buying bonds since they have fewer quality customers to lend to.

In the interbank market, commercial banks hold 71% of the Chinese government bonds, valued at around 20.3 trillion yuan.

Other kinds of bonds issued by state policy banks that are denominated in yuan are also purchased by banks.

(Adapted from Investing.com)

Categories: Economy & Finance, Strategy, Uncategorized