CHINA’S central bank has flagged interest rate risks to some financial institutions, asking them to cut leverage and reduce their exposure to long-dated bonds following a feverish rally, sources said on Friday (Apr 26).

A branch of the People’s Bank of China (PBOC) in eastern China has informally asked some institutions to reduce bond duration and focus on their core businesses, two people with direct knowledge of the matter said.

The verbal instructions – or “window guidance” – follows the central bank warning in a publication this week that sharp gains in long-dated bonds failed to reflect future economic growth prospects.

“This is in line with the regulator’s recent caution that yields of long-dated bonds are too low,” said one source.

“Some rural commercial banks may be too aggressive in buying such bonds, and regulators wanted to prevent risks.”

Yields on 30-year bonds have dropped more than 35 basis points (bps) this year as worries about China’s economic health helped fuel a record-breaking rally in Chinese treasuries.

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Yields have an inverse relationship with bond prices. Long-dated bonds tend to have a longer duration and are more sensitive to interest rate fluctuations.

The PBOC did not immediately respond to a Reuters’ request for comment. REUTERS