Yield Collapse Accelerates
The 10-year China government bond (CGB) yield fell to 1.48% on Wednesday, the lowest on record, after the PBOC injected a net 1.2 trillion yuan ($165 billion) through its medium-term lending facility and reverse repos this week. The move, aimed at countering deflationary pressures and a property slump, has instead fueled a bond rally that many fear is overheating. The 10-year yield has fallen 25 basis points since the start of October, while the 30-year yield dropped to 2.25%, flattening the curve to its lowest slope in a decade.
Emergency Curve Control Measures
In a rare move, the PBOC announced it would cap the 10-year yield floor at 1.45% and threatened to sell government bonds from its balance sheet to enforce the limit. The central bank also introduced a new liquidity tool: a 500 billion yuan outright reverse repo facility with a 1.5% floor rate, effectively setting a floor for short-term rates. The measures echo the BOJ's yield curve control but are inverted: here, the PBOC is trying to prevent yields from falling too far, not rising. The announcement initially pushed the 10-year yield up 3 basis points to 1.51% before settling at 1.48% as investors bet the PBOC would be forced to ease further.
Market Impact and Investor Flows
The bond rally has been driven by a surge in bank deposits and a lack of credit demand. Chinese banks purchased a record 1.5 trillion yuan of CGBs in September, and foreign investors added 300 billion yuan in the first three weeks of October, according to ChinaBond data. The PBOC's easing has also weakened the yuan, with the offshore renminbi (CNH) depreciating 0.8% to 7.32 per dollar this week. Equity markets are mixed: the CSI 300 is up 1.2% on hopes of further stimulus, but bank stocks are under pressure as net interest margins compress.
What to Watch
The key test will be the PBOC's willingness to sell bonds from its balance sheet, which stood at 45 trillion yuan at end-September. Any signs of aggressive selling could trigger a sharp reversal in yields, hurting leveraged bond funds and banks. Meanwhile, the 1.5% floor may be tested as early as next week if economic data continues to disappoint. Investors should also watch the 10-year China-US Treasury spread, which has widened to 280 basis points, the widest since 2023, potentially accelerating capital outflows.
