The Hindu Business Line

Chinese bonds down


China’s sovereign bonds posted the biggest weekly decline in two years, reeling from the fallout of hawkish Federal Reserve comments, yuan depreciati­on pressures and waning liquidity. The 10year sovereign yield surged 25 basis points this week, the most since December 2014, to 3.35 per cent on Friday. The yuan, which fell to an eight-year low, is heading for the biggest weekly decline in a month.

While the Fed’s indication­s of quicker tightening fuelled fears of faster fund outflows and ignited a record one-day yield jump on Thursday, Chinese bonds have been under pressure in recent weeks from a government-driven effort to reduce leverage. Given capital outflows, the overall liquidity in the domestic market is volatile, said Kun Shan, head of local market strategy in China at BNP Paribas SA in Shanghai. While the PBOC has been using new lending tools and open-market operations to replenish liquidity, they haven’t been enough to offset persistent cash outflows.

Policy makers shifted their focus in the second half of this year to reducing financial risks as economic growth stabilised, with PBOC Deputy Governor Yi Gang saying in early September that the nation’s short-term goal is to lower leverage ratio growth. By steering money-market rates higher, the PBOC has forced a correction in the highly leveraged bond market, while home prices are showing signs of cooling amid property curbs.

In the eight months through November, the outstandin­g balance in the monetary authority’s Medium-term Lending Facility increased by 1.4 trillion yuan ($201 billion), while the PBOC’s yuan positions, a gauge of capital flows, dropped by 1.6 trillion yuan.

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