China Bond Yields Turn Negative in Burst of Friday Trading

(Bloomberg) -- Negative bond yields showed up in China on Friday.

Three bonds of China Development Bank suddenly saw prices surge -- one by more than 200% -- within an hour to send the yields on the policy bank notes deep into negative territory of almost -15%.

In signs that the trades may not have been a matter of fat fingers, the Shenzhen Stock Exchange imposed restrictions on those involved to “maintain orderly conduct in markets and protect the rights of investors,” it said in a statement. “Market players should comply with the law and regulations when they trade bonds,” it added in the three-sentence notice.

The unusual trades highlight the challenges Chinese policy makers face as they seek to modernize a market that has long been criticized for its poor liquidity. It also happened just as top leaders gathered in Beijing for the annual session of the National People’s Congress to chart the country’s future, with one focus being the reform of the financial market.

The 2027 bond traded in Shenzhen saw its price more than triple in about 30 minutes on Friday morning, according to data compiled by Bloomberg. The yield on the bond was last seen at -14.2% in the afternoon session, compared with Thursday’s closing rate of 3.49%.

Two other notes of the policy bank also saw prices soar. A 2.99% bond due in 2025 more than doubled to 220 yuan, resulting in a yield of -14.5%, while a Shanghai-traded 3.23% note due in 2027 gained as much as 22% to 121.5 yuan before paring.

The Shenzhen Stock Exchange found that certain investors showed abnormal trading behavior such as buying and selling the 2027 bond to and from themselves, it said in a statement. The exchange said it imposed a six-month trading restriction on those investors.

Futures Rally

The most actively-traded 10-year China Development Bank bonds rose, with the yield sliding four basis points to 3.69%.

Separately, futures on government bonds jumped to the highest level in nearly a month in a burst of trading in the afternoon.

“Investors were pricing in uncertainties in economic growth after today’s government work report,” said Li Yong, an analyst with Soochow Securities Co.

China set a conservative economic growth target of above 6% for this year, well below what economists forecast.

Read: China’s Bonds Seen Under Pressure From Sale Plan: Analysts (1)

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With assistance from Bloomberg