China’s central bank boosts liquidity to calm bond market jitters

China’s central bank dropped a bomb of cash on Friday. The People’s Bank of China (PBOC) pushed 601.8 billion yuan, about $84 billion, into the system using reverse repurchase agreements, trying to slow down a snowballing bond selloff before it smashes through the financial system.

This was the biggest daily liquidity injection since January. Bond yields had been spiking for a week. Specifically, China’s 30-year government bond yield climbed seven straight days. That finally changed Friday.

The surge stopped. Futures tied to the same bonds also paused a losing streak that had dragged on for more than two years, so the central bank stepped in because the selloff risk was turning into a full-blown panic.

Redemptions trigger heavy withdrawals from bond funds

This problem has been building for quite some time. Longer-dated bond prices have dropped, and Chinese authorities are now on edge. Two things are draining demand: a shaky U.S.-China trade truce, and China’s effort to fight deflation. That’s made it harder for bonds to stay attractive.

Data showed redemption pressure spiked on Thursday. A key metric tracking fixed-income fund redemptions hit its highest level since October. The cause? Bond holdings by funds have nearly doubled in two years, so there’s more at risk when people start pulling out money.

According to Huatai Securities, this kind of pressure doesn’t ease on its own. Analysts led by Zhang Jiqiang warned, “Judging from past experiences, the bond market may see amplified pressure once fund redemptions start.” If investors keep withdrawing, funds will have to sell more bonds, which only pushes prices lower and fuels more exits.

They added that unless the PBOC keeps pumping liquidity, either through open market operations or buying bonds directly, this could spiral. Another way to stop the bleeding might be slowing down gains in the stock market, which is where some of the cash is now headed.

And things already seem to be speeding up. Local funds yanked 120 billion yuan out of bonds in just three trading days through Thursday. That’s not a trickle, that’s a full-blown exit.

A local newspaper also reported that over 90% of China’s 3,182 mutual bond funds tied to medium and long-term debt posted losses between Monday and Wednesday. Meanwhile, in the primary market, the finance ministry tried to sell 30-year special sovereign bonds on Thursday.

The average yield hit 1.97%, the highest since March. Buyers clearly wanted more return to take on that risk, which means confidence is eroding, which pushes borrowing costs higher across the board.

That pain is also spilling into the credit market. The average yield on AAA-rated 3-year corporate bonds jumped 11 basis points this week. That might sound small, but for top-rated bonds, that’s a big move. It’s on track to be the biggest weekly increase since February, according to the ChinaBond index.