China’s finance ministry auctioned 30-year bonds at a yield of 2.57 per cent on Friday, largely in line with expectations, as Beijing kicked off sales of 1-trillion-yuan long-term special bonds to help stimulate a flagging economy.

 

The coupon on the bonds, worth 40 billion yuan ($5.53 billion), was slightly higher than yields in the secondary market at the time of the auction and a tad lower than the 2.58 per cent estimate in a Reuters poll.

 

Chinese long-dated treasury bond yields are determined by growth and inflation expectations but also short-term factors, so investors must be cautious and avoid speculation, central bank-affiliated Financial News said in a front-page article on Friday.

 

The bid-to-cover ratio for the first tranche of the special bonds was 3.91 times, suggesting solid demand for such bonds.

 

The yield on China’s 30-year treasuries rose 1.75 basis points (bps) to 2.5775 per cent as of 0339 GMT on Friday.

 

A stuttering recovery in the world’s second-biggest economy has driven the record-breaking rally in Chinese government bonds over the past few months, with yields on 30-year bonds down as much as 40 bps this year.

 

The finance ministry unveiled details of the 1-trillion-yuan special government bond issuance pipeline on Monday that cover tenors of 20 to 50 years, aimed to help fund stimulus for key sectors of a flagging economy.

 

A poll of 34 market participants indicated ahead of the auction that the coupon on the first tranche of 30-year special bonds could be within the range of 2.50 per cent-2.61 per cent, with an average of 2.5780 per cent.

 

Sharp moves in yields recently prompted the central bank to warn that they might have deviated from long-term economic growth expectations.

 

Recent economic data including total social financing and the producer price index reveal an ongoing imbalance in the shift from old to new economic growth drivers, highlighting the need for policy initiatives to boost domestic demand, said Alvin Cheng, portfolio manager at Fidelity International.

 

“The need for issuing special treasury bonds has become more pressing,” said Cheng.

 

The special bond issuance is being spread over a six-month period, limiting liquidity shocks in the market, but investors are watching closely for additional policy signals that could affect volatility during the issuance process.

 

China’s central bank kept the size of its medium-term lending facility unchanged in May on Wednesday, after contracting it in the previous two months.

 

“In our view, this reflects a policy preference to maintain supportive liquidity conditions ahead of the bond issuance,” said Pin Ru Tan, head of Asia rates strategy at HSBC.

 

“We think that the central bank is likely to provide more liquidity over the coming months, possibly via required reserve ratio reductions,” Tan said.

 

First Published: May 17 2024 | 11:28 AM IST