[BEIJING] Chinese government bonds declined in Friday (Sep 5) afternoon trading as an equity rebound extended and higher yields at a longer-dated auction disappointed some investors.
Futures on 30-year sovereign notes dropped almost 1 per cent, the most in nearly three weeks. This was even after an earlier 30-year bond auction suggested a moderate improvement in demand.
The auction aftermath showed selling pressure on bonds remains linked to a stock-buying frenzy, even as regulators are said to be looking to damp speculation in the market. Demand measures were better than previous sales, but investor optimism looks skewed toward riskier assets over lower-yielding debt.
The finance ministry sold 30-year notes at an average yield of 2.11 per cent, lower than the 2.15 per cent drawn in a sale two weeks ago of the same tenor, but higher than 2.08 per cent where cash bonds were trading at on Friday. The bid-to-cover ratio, a gauge of demand, rose to 3.02 from 2.89 in the previous auction.
The difference between the average and cash yields was a factor in the selloff, according to two traders who asked not to be identified as they were not allowed to speak publicly.
The bond market is sitting on edge as there will still be some uncertainty on liquidity conditions into quarter-end as cash demand rises, which will call for more support from the People’s Bank of China, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group.
The central bank infused 1 trillion yuan (S$180.3 billion) of liquidity via a three-month outright reverse repurchase agreement on Friday, matching maturities. In the daily open market operation, it drained a net 595 billion yuan of short-term cash, the most since August 1.
Yields on 30-year cash bonds gained 4 basis points on Friday, after retreating earlier this week from a nine-month high touched at the end of August. Traders expect an extended rally in stocks may prompt investors to abandon China’s low-yielding bonds for equities, after a broad wave of redemption from bond funds.
Friday’s auction was an 82 billion yuan reopening of 30-year notes. China also sold 157 billion yuan one-year government bonds at an average yield of 1.35 per cent, compared with 1.33 per cent in the last auction on August 6. BLOOMBERG
