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China Corners Bond Bulls as $35 Billion in Funds Reach Maturity

Cracks in China Bonds Have Traders Watching $35 Billion Maturity

(Bloomberg) -- China’s central bank offered little in the way of relief to bond traders as it allowed last week’s massive cash injections to mature.

The People’s Bank of China skipped open-market operations again Tuesday, effectively draining 250 billion yuan ($35 billion) in liquidity from the financial system as funds come due. It said fiscal spending at the end of the month will offset maturities, according to a statement. Another 290 billion yuan is maturing in the next three days.

Whether China will act to slow the sudden downward spiral in government debt has become a key question for investors. Monday’s effective net withdrawal spooked a bond market already under pressure from returning risk appetite, with China’s 10-year yields surging the most since April. Selling momentum on sovereign notes was the strongest since late 2017.

“Following two days of net cash drainage, there are strong expectations that the PBOC will conduct targeted medium-lending facilities to add liquidity tomorrow,” said Zhaopeng Xing, a markets economist at ANZ Bank China Co. He added the central bank may inject nearly 300 billion yuan on Wednesday. “But I don’t think a turning point has appeared for the sliding bonds, which will continue to be pressured until a phase-one trade deal is signed.”

China Corners Bond Bulls as $35 Billion in Funds Reach Maturity

The PBOC defied some market watchers’ expectations by not using the targeted monetary tool since last week to inject one-year cash. A spike in 12-month interest-rate swaps shows traders are pricing in tighter liquidity.

“The PBOC is quite consistent in that they’re keeping their powder dry for now,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. “There’s no need for them to ease in a big way, they want to keep some policy buffer for future economic risk.”

The yield on China’s benchmark government bonds has jumped about 30 basis points since a low in September, as optimism increases that the country will soon sign a partial trade deal with the U.S. Accelerating inflation also adds pressure to the bond market, as it means Beijing won’t want to inject too much liquidity and risk inflating prices further.

China’s 10-year sovereign yield was flat with Monday’s finish at 3.295% as of 10 a.m. in Shanghai.

--With assistance from Claire Che.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Livia Yap in Shanghai at lyap14@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sofia Horta e Costa

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