In a pivotal move reflecting the ongoing dynamics of the bond market, the central bank of China announced on January 10, 2025, its decision to halt the purchase of government bonds effective from the same monthThis announcement comes after a continuous five-month streak of net purchases of treasury bonds, culminating in an impressive accumulation of 1 trillion yuan during that periodThe decision is largely seen as a strategy aimed at stabilizing bond yields, mitigating potential interest rate risks, and maintaining exchange rate stability, indicating a cautious yet proactive approach in monetary management.

The decision to suspend the open market operations regarding bond purchases comes in light of a persistent supply-demand imbalance in the government bond marketThe central bank has opted to pause these purchases to counteract a pre-existing trend that saw bond yields plummetingAs of December 2024, key rates for one-year, ten-year, and thirty-year bonds had dipped to approximately 1.1%, 1.7%, and 1.9% respectively, fostering concerns among analysts about the resulting narrow yield curve and its implications on interest rate margins within financial institutions.

Entities such as Guangfa Securities have pointed out that this pause is a strategic move to stabilize bond yieldsThe risk of financial institutions experiencing a mismatch between asset yields and borrowing costs, potentially leading to excessive risk-taking, has also been highlightedIndeed, overleveraging in a low-yield environment raises the stakes, prompting the central bank to take measures in anticipation of these risks surfacing in the financial ecosystem.

As of January 22, 2025, the ten-year government bond yield had risen by nearly eight basis points from its earlier lows, hovering around 1.67%. This incremental uptick signals shifting sentiments in the market, which have included anticipated responses to rate cuts

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Analysts note that the bond market had been holding onto aggressive expectations of interest rate adjustments, leading to a phenomenon some describe as an "asset drought," effectively fuelling excessive speculative behavior.

Against this backdrop, the central bank faces an intricate balancing actThe goals of monetary policy are multifaceted, including fostering economic growth and controlling inflation while also ensuring internal financial stability and external currency stabilityThe market's assumption of rapid interest rate cuts could lay the groundwork for an unsuitable environment should expectations prove unfoundedTherefore, the recent decision to halt bond purchases serves as a crucial warning signal that prevents yields from declining too rapidly.

On the global front, recent policy changes in the United States present further complicationsThe recent introduction of tariffs and tax cuts under the Biden administration, termed "re-inflationary," have compelled the Federal Reserve to reassess its stance on interest ratesThe subsequent decline in expected rate cuts has resulted in a significant appreciation of the dollar and a corresponding rise in U.S. treasury yields, placing added pressure on non-U.S. currencies, including the renminbiConsequently, the currency has also observed slight depreciation, trading around 7.36 in offshore markets as of January 10, 2025.

The monetary authority's ability to maintain stable currency and bond yields will be tested as the year unfoldsIn anticipation of increasing liquidity demands leading up to the Lunar New Year, an unconventional solution seems to be on the horizonThe central bank announced that it would implement a bidding process for 600 billion yuan worth of central bank bills in Hong Kong, designed to inject liquidity into the market while establishing a new record for single issuance volumes.

Additionally, remarks made by central bank Governor Pan Gongsheng on January 13 during the Asian Financial Forum underscored the central bank's commitment to maintaining the stability of the foreign exchange market

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