China’s ultra-long special bonds surge on exchange debut, triggering suspensions
THE first batch of China’s one-trillion-yuan (S$186 billion) ultra-long special treasury bonds, which debuted on Wednesday (May 22), surged more than 20 per cent on the Shanghai and Shenzhen stock exchanges, triggering trading suspensions.
The eye-popping bids on the bourses, where retail investors can trade these sovereign bonds designed to shore up a fragile economy, contrast with their subdued debut in the interbank market.
“It shows bullish sentiment,” said Wang Hongfei, a bond trader. “Exchange investors are trading the bonds in the same way they trade stocks.”
Since the stock exchanges are not the primary trading venue for bonds in China, “a small amount of money can pump up prices,” Wang added,
The 30-year treasury bonds jumped more than 13 per cent at the Shanghai exchange open, prompting a 30-minute suspension by the bourse, which cited “abnormal fluctuations” and urged investors to “invest rationally” while paying attention to risks.
They were suspended again until late afternoon after the bonds shot up 25 per cent following the resumption of trade.
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On the Shenzhen Stock Exchange, the bonds surged 23 per cent, triggering similar regulator-imposed suspensions.
China plans to sell one trillion yuan of special treasury bonds this year, with tenors of 20, 30 and 50 years. The bond sales are part of a broader effort by authorities to revive key sectors of a struggling economy.
The first batch of the special treasuries started trading on Wednesday in several marketplaces – the interbank market, stock exchanges, and the so-called OTC bond market, where individuals can participate via bank outlets.
In the interbank market, banks are the biggest bond investors and they tend to hold rather than trade such securities. Yield on the special bond in this market was little changed at 2.5710 per cent, close to the 2.57 per cent coupon.
Regulators have also cautioned banks in recent months about the interest rate risks of their long-term government bond holdings amid feverish demand for such securities.
Since the start of the year, China’s treasury bond market has been swept up by a record-breaking rally fuelled by investors’ flight to safety amid the shaky economic recovery.
The price surge on exchanges was triggered by a confluence of factors including “expectations of lower rates, animal spirit, and a relatively illiquid market”, said hedge fund manager Chen Feng. “Anyone who buys at the current price would be burnt.”
PBOC bond trading
Some traders had speculated that the sale of the one-trillion-yuan special bonds could cause a cash squeeze in the market, and called on support from the central bank.
The People’s Bank of China (PBOC) has hinted in recent weeks that it could start treasury bond trading as a way to manage liquidity.
However, the strong bullish sentiment towards treasuries suggested the central bank will be in no hurry to participate.
The special bond sales will be issued in many batches over the next six months, so “they would be easily digested by the market”, said Zheng Lianghai, fund manager at Fuanda Fund Management.
“There’s a shortage of good assets, not liquidity,” he said.
Ting Lu, chief China economist at Nomura, said he expects the PBOC to start trading bonds “perhaps within the next six months”, and might choose a time of market volatility “so it will present the desired impact of stabilising interbank rates”. REUTERS
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