Chinese regulators limit bond risks with duration cap on new funds: sources

    • The securities watchdog has recently asked major mutual fund companies to cap the duration of their new bond funds to two years.
    • The securities watchdog has recently asked major mutual fund companies to cap the duration of their new bond funds to two years. PHOTO: REUTERS
    Published Wed, Aug 7, 2024 · 05:58 PM

    CHINESE regulators have moved to restrict the duration of new bond funds, sources told Reuters, in an apparent attempt to curb investment in long-dated treasuries as authorities ramp up efforts to cool a sizzling bond rally.

    The securities watchdog has recently asked major mutual fund companies to cap the duration of their new bond funds to two years, according to three sources with direct knowledge of the guidance.

    The cap on duration would “also rein in funds that invest in medium- and long-dated bonds,” said one of the sources.

    Bond fund managers need to sign letters of pledge, said another.

    The purchase restrictions target new bond funds managed by top mutual fund companies, and do not apply to existing products, the sources said.

    Duration measures a bond’s interest rate risks, and the ceiling would prod fund managers to limit their exposure to long-dated bonds.

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    The China Securities Regulatory Commission (CSRC) did not immediately respond to a Reuters request for comment.

    The measures come as China steps up efforts to cool frenzied bond buying that pushed long-dated yields to record lows.

    The People’s Bank of China (PBOC) has asked some financial institutions to report daily changes in their long-term treasury bond positions, sources said this week, signalling tighter scrutiny. Also this week, big state banks were seen selling large volumes of treasuries after benchmark 10-year yield hit a low of 2.08 per cent on Monday.

    The rally in Chinese treasuries has been powered by investors seeking safe harbours in a wobbly economy, where banks keep cutting deposit rates and stocks remain volatile.

    The central bank has repeatedly warned against reckless bond buying, worried about a potential bubble that could end up in a Silicon Valley Bank-style crisis.

    Big funds

    China’s biggest mutual fund companies include China Asset Management, E Fund Management and China Merchants Fund Management.

    Mutual funds are a key conduit of money flows into bonds. Bond fund assets jumped 45 per cent from a year earlier to 6.89 trillion yuan (S$1.39 trillion) at the end of June.

    Fund managers have already moved to control bond risks amid higher market volatility, with a growing number of bond funds restricting inflows in recent months.

    Although the economic backdrop remains friendly to bonds, “potential negative elements could increase market volatility,” Liu Yakun, analyst at China Galaxy Securities said in a note.

    Risks include potential central bank intervention and looming waves of treasury bond issuance, Liu said.

    The PBOC said last month it has hundreds of billions of yuan at its disposal to sell as the central bank seeks to put a floor under falling yields. REUTERS

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