China Boosts Two-Year Bond Sales to Record Amid Debt Selloff

Yahoo

14-03-2025

(Bloomberg) -- Chinese bonds face a crucial test this week as the government plans a record issuance of two-year notes just when a debt-market selloff is worsening.
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The finance ministry said in a statement it is planning to sell 167 billion yuan ($23 billion) of two-year government bonds on Friday, the largest-ever offering of the tenor in a single auction, according to Bloomberg compiled data. The move may challenge China's debt market, as any signs of weak demand in auctions may accelerate a rout that's already sent the benchmark yield to the highest level this year.
Chinese bond yields have jumped this year due to the PBOC's reluctance to ease monetary policy, tight liquidity and optimism toward Chinese stocks. The yield on two-year government debt rose to its highest since October Monday, having surged about 50 basis points since early January, which may deter investors from buying bonds fearing further losses.
The yield on 30-year government bond climbed five basis points to trade higher than 2% for the first time this year. The yield on two-year note surged seven basis points to 1.6%, while that on the benchmark 10-year debt climbed six basis points.
Funds have boosted their selling of Chinese government bonds on Tuesday, accelerating increases in sovereign yields, according to market participants. The rebound in local stocks had weighed on sentiment toward fixed-income products, they said. They asked not to be identified as they aren't allowed to comment on the rates market publicly.
Also on Friday, another 30 billion yuan of 30-year notes will be auctioned, same with the previous issuance.
Bond losses accelerated in the past few weeks amid weak demand for notes. One-year yield gained over nine basis points on February 14, the most since 2023, after an auction saw elevated yield on marginal bids. Last week, another batch of one-year notes was sold at the highest yield since April 2024.
It may be too early to say the auction result will turn out to be very poor, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. However, in any case, the auction result will be a barometer of sentiment in the market, he said.
Expectations remain in place that the PBOC will step up necessary liquidity support for the economy, given persisting deflationary pressures and Beijing's growth ambition in a year of escalating trade tensions with the US. The timing of any bold monetary stimulus remains uncertain amid risks to the yuan.
The Chinese central bank has refrained from lowering interest rate or banks' required reserve ratio since September last year. It has also paused on buying of government bonds in the first two months this year. Some local fund houses are seeing benchmark debt yield testing 2%, should there be further delays in RRR cut.
China's annual debt supply of new government bonds is set to increase to 11.86 trillion yuan this year, after officials raised the general budget deficit target to around 4% of GDP, the highest level in more than three decades.
--With assistance from April Ma and Iris Ouyang.
(Updates with latest yields and trader comments.)
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