For weeks the People’s Bank of China has voiced concern about a bubble forming in the country’s sovereign bond market. Now it has moved from talking about the problem to arming itself for its first direct market intervention in decades.
On Friday the central bank said it had struck deals with several institutions to borrow several hundred billion renminbi of long-dated bonds that it can sell into the market to try to satisfy demand. The PBoC said it would continue to borrow and sell the bonds on an open-ended and unsecured basis.
The moves are the strongest signal yet of the central bank’s determination to slow the rush of money into sovereign bonds, which has sent yields — which move inversely to prices — to record lows. The central bank fears that eager buyers such as regional banks may be storing up trouble if yields rebound abruptly and the value of their holdings drops, creating the potential for a crisis similar to the collapse of Silicon Valley Bank last year.