The People's Bank of China attributed the suspension to a lack of available bonds in the market, which were part of its strategy to facilitate easier monetary conditions.
However, this decision aligns with a severe selloff in major global bond markets, indicating that China's central bank may be attempting to ensure that domestic yields rise correspondingly, according to analysts.
Following the central bank's announcement, yields, which move inversely to bond prices, surged. The yield on China's 30-year treasury increased by five basis points in early trading, while the 10-year yield rose by four basis points, both of which had recently reached record lows. The yuan also experienced a slight uptick.
Ken Cheung, chief Asian FX strategist at Mizuho Bank, noted, "A significant factor contributing to the yuan's depreciation is the widening yield differential between China and the U.S., so the central bank is signaling to the market that further declines in yield rates are unlikely."
This unexpected announcement comes just months after the PBOC initiated bond purchases to enhance liquidity management. The central bank stated it would consider resuming bond buying through open market operations "at an appropriate time based on supply and demand in the government bond market."
Additionally, this announcement follows the PBOC's warnings regarding potential bubble risks in a bond market where long-term yields have consistently reached record lows, as investors seek safe assets amid a weakening economy and anticipate further monetary easing.
Bond prices in China have experienced a sustained rally over the past decade, gaining momentum approximately two years ago due to challenges in the property sector and a downturn in the stock market. This situation has led to a significant influx of capital into bank deposits and the debt market.
Recently, bond prices surged, resulting in 30-year yields dropping to as low as 1.8%. This decline reflects pessimistic economic outlooks, an increasing disparity between China's interest rates and those of the U.S., and additional depreciation pressures on the yuan, which has reached a 16-month low and has decreased nearly 5% since its peak in September.
Huang Xuefeng, research director at Shanghai Anfang Private Fund Co, anticipates that the downward trend in bond yields will continue as the market faces an "asset famine," characterized by a lack of viable investment options.
Given the pressure on the exchange rate and the rapid decline in yields, the central bank recognizes the need to support bond market sentiment, according to Yu Yangyu from Guangdong Shunde Rural Commercial Bank Co, who spoke at a recent investor webinar.
On Friday, Financial News, a publication of the People's Bank of China, cited an economist advising the market to temper expectations regarding potential monetary policy easing.