Chinese leader Xi Jinping is vying with little success to turn stock bears into bulls. But over in the bond market, China faces the opposite problem with irrational exuberance pushing long-term yields too low.
That has authorities scrambling to tighten their grip on the globe’s third-biggest government debt market. On Monday, prices tumbled as the People’s Bank of China (PBOC) intervened assertively in the market. It was the worst day in 17 months for China’s 10-year treasury futures, sending yields up 4 basis points.
The recent plunge in bond rates is putting downward pressure on the Chinese yuan at a moment when Xi favors a stable-to-firmer exchange rate. The problem for Xi and the PBOC is that bond bulls argue the rally is supported by underlying fundamentals – including slowing growth and deflationary pressures – and has room to grow.
