China's Central Bank Halts Bond Purchases Amid Currency Concerns

China's central bank has halted its purchases of treasury bonds, triggering a rise in yields and fueling speculation that the move is intended to defend the weakening yuan, Reuters reports.

The People's Bank of China (PBOC) attributed the suspension to a shortage of bonds in the market, citing its efforts to ease monetary policy. However, the move coincides with a global bond market selloff, leading analysts to suggest that the PBOC is aiming to align domestic yields with the upward trend in international markets.

Following the announcement, yields—which move inversely to bond prices—jumped. China's 30-year treasury yield climbed five basis points, while the 10-year yield rose four basis points. Both had recently hit record lows. The yuan also experienced a slight increase.

"One of the key reasons for the depreciation of the yuan is the widened yield gap between China and the U.S., so the central bank is sending a signal to the market that the yield rate is unlikely to fall further," said Ken Cheung, chief Asian FX strategist at Mizuho Bank, to Reuters.

The unexpected announcement comes just months after the PBOC initiated bond-buying measures to improve liquidity. The central bank has stated its intention to resume bond purchases through open market operations "at a proper time depending on supply and demand in the government bond market."

This move also follows warnings from the PBOC regarding bubble risks in the bond market, where long-dated yields have reached record lows as investors seek safe havens amidst economic uncertainty. Bond prices in China have been on a steady upward trajectory for over a decade, accelerating roughly two years ago due to property sector woes and stock market weakness, driving a surge in funds into bank deposits and debt markets.

The recent rally in bond prices pushed 30-year yields as low as 1.8%, reflecting pessimistic economic outlooks and widening the rate differential with the US, further pressuring the yuan. The currency is currently at its lowest point in 16 months, having depreciated 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 persist due to a "market continues to grapple with an asset famine situation" characterized by a lack of attractive investment opportunities.

Yu Yangyu, an economist at Guangdong Shunde Rural Commercial Bank Co, noted the central bank's need to maintain bond market sentiment, given the pressure on the exchange rate and rapidly declining yields.

Financial News, a publication affiliated with the PBOC, quoted an economist as cautioning against excessive expectations for further monetary easing.