China Bond Yield Turning Briefly Negative Shows Investor Risks

By any standards, the move in a normally dull Chinese policy bank bond was unusual. The 2027 bond surged more than 200% in Friday trading, sending the yield to -14% by the close. On Monday, the move was erased, but concern over what happened will linger.

The Shenzhen stock exchange scrambled to minimize the fallout from the moves, which occurred in three China Development Bank bonds. It restricted trading for those who bought and sold the bonds for the next six months, while it also issued an order preventing retail investors from buying two of the bonds for now.

Authorities will be keen to avoid such volatility in the future, especially given increased nervousness about a global slump in government debt. Policy bank bonds, quasi-government debt used to finance state projects and economic development, have been growing more popular with foreigners after they were included in global indexes.

“This kind of trading has never been seen in China’s bond market before,” said Yang Hao, a fixed-income analyst at Nanjing Securities. “There’s speculation that last Friday’s trading could have been some investors trying to drive up treasury bond futures by manipulating CDB bonds that have small trading volumes.”

China Bond Yield Turning Briefly Negative Shows Investor Risks

Just 1.1 million yuan ($169,000) worth of securities on the three bonds changed hands, according to data from the Shanghai and Shenzhen exchanges.

The 2027 bond traded in Shenzhen traded at 98 yuan with a yield of 3.6% Monday. Yields on a 2.99% bond due in 2025 and Shanghai-traded 3.23% note due in 2027 recovered to 3.69% and 3.29%, respectively.

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