-- China’s decision to step into its government-debt market shows that officials are willing to act to curb a relentless bond rally, but it raises new questions about efforts to stimulate the world’s second-largest economy.The People’s Bank of China sold long-dated bonds and bought short-maturity securities in a move that resulted in a net purchase of 100 billion yuan of debt in August, according to a statement on its website Friday.
The central bank stopped short of specifying the tenors of the debt it traded or the dates of its operations in its statement. But its actions could help push up longer-term yields relative to short-term rates, steepening the yield curve and easing the flows into fixed-income assets. “The PBOC is trying to muddle through driving economic growth, but also achieving these political objectives of a stronger renminbi and higher long-end yields,” Green said. “It’s fighting economic gravity, as it were, and the flows into fixed income that aren’t likely to diminish.”
To Bob Savage, BNY’s head of markets strategy and insights in New York, the PBOC’s bond operations likely won’t have the same staying power as those seen in the US or Japan. Such an approach would give the central bank more flexibility to ensure ample cash supply, just as the room for using traditional tools such as adjustments of the reserve-requirement ratio is shrinking.
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