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E-mail China.org.cn, February 28, 2025
Bloomberg News:
I have several questions about the treasury bond market. In the central bank's view, do current treasury bond yields accurately and fairly reflect the fundamentals of the economy? What further measures will the central bank take to manage risks in the treasury bond market? Additionally, we've noticed that the central bank has recently suspended its treasury bond purchases. Could you explain why these purchases were halted and how long this suspension might last? Will the central bank increase the scale of its government bond trading this year?
Xuan Changneng:
Let's invite Mr. Zou to answer these questions.
Zou Lan:
Thank you for your questions. Recently, the rapid decline in long-term treasury bond yields has drawn widespread attention. After years of development, China's treasury bond yield curve has essentially established itself as a benchmark for pricing in financial markets. The level of treasury bond yields not only affects the government's financing costs but also has broader implications for the stable development of the entire financial market. Overall, long-term government bond yields reflect market expectations for future long-term economic growth, while also being influenced by market supply and demand dynamics. Since 2024, China's economy has been recovering and improving amid fluctuations. In particular, market expectations and social confidence have significantly improved since September. The economy is expected to achieve the annual growth target of around 5%. The recently held Central Economic Work Conference once again emphasized implementing more proactive and effective macroeconomic policies for maintaining stable economic growth. The improvement in economic expectations will ultimately be reflected in government bond yield levels.
Treasury bonds represent sovereign credit. If held to maturity, bondholders are guaranteed to receive both the principal and stated coupon interest, with no credit risk. Therefore, treasury bonds are typically considered safe assets. However, since long-term treasury bonds carry fixed coupon rates, changes in market interest rate expectations can lead to price fluctuations in the secondary market, which can sometimes be significant. Therefore, investing in government bonds is not without risk. For example, if you had bought a 30-year treasury bond at the end of 2023 and sold it now, the coupon interest income would have been less than 3%. However, the total investment return, including capital gains, would be close to 20%. The high returns have attracted continuous inflows of various types of capital into this market. These changing supply-demand dynamics have further driven up prices, with trading volumes of certain bond issues exceeding 10 times their previous levels. Conversely, at the end of 2022, long-term treasury bond yields rose by about 20 basis points within a few days, causing a sharp decline in secondary market prices. Some bank wealth management products that invested in treasury bonds fell below their net asset value, triggering concentrated redemptions. This further accelerated the price decline and resulted in significant losses for investors. The 2023 Silicon Valley Bank incident is another similar example. Let me take the 30-year government bond as an example. If long-term treasury bond yields do not accurately reflect economic fundamentals, or if there is a significant change in supply and demand, a 30-basis-point rise in yields would result in a price decline of more than 5% in the secondary market. When we factor in the amplifying effects of financial leverage used by some institutions and the downward spiral triggered by concentrated redemptions, greater losses could occur in the short term.
The PBC respects the market and the choices of all market participants who take risks and make independent decisions. The central bank also highly values the market information reflected in treasury bond yield changes. China's bond market is relatively young, having not experienced significant upheavals since the 1990s. As a result, many investors, managers and particularly the general public are not fully aware of the market price risks that underlie the high returns on government bonds. Therefore, the PBC has strengthened macro-prudential management, repeatedly warned of risks and enhanced market supervision. During periods of lower issuance activity in the primary market, the central bank suspended its secondary market purchases and instead used other tools to inject liquidity. This strategy aims to avoid affecting investors' allocation decisions while preventing supply-demand imbalances and market volatility, ultimately ensuring the market's long-term stability.
Thank you.
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