(Bloomberg) — China is investigating potentially illegal behavior by some financial firms in bond trading, the latest sign that authorities want to calm speculation following a rally in the sovereign debt market.
An entity backed by the People’s Bank of China is investigating six financial institutions for allegedly violating rules when they hold bonds on behalf of others or lend their trading accounts, according to a statement released Friday. Some employees are “colluding” with outsiders to take advantage of lower returns and transfer advantages, the National Association of Institutional Capital Markets Investors said.
Although the statement does not mention any of the companies under investigation, it highlights the growing unease among policymakers about possible bubbles brewing in the bond market. Amid economic uncertainty, the country’s 10-year government yield fell 27 basis points this year to near its lowest level in two decades.
Beijing is wary of an overheated bond market that is preventing cash from flowing into the economy. Officials began taking action in early March, when they stepped up their oversight of regional banks’ bond investments and urged them to focus on supporting small businesses. Bloomberg reported last week that rural lenders had received guidance allowing them to cap their holdings of ultra-long bonds.
Earlier this month, the PBOC said it would monitor changes in long-term yields at its quarterly meeting of its monetary policy committee. On Friday, a central bank-backed newspaper said some market participants had become more cautious about a potential increase in supply this quarter.
Chinese regulators are banning bond investment account lending and trading on behalf of others, a result of tightened restrictions in place since 2018. The changes follow a major incident in 2016, when misconduct by an employee of a small brokerage caused a liquidation of the debt. walk.
The National Association of Financial Market Institutional Investors, an interbank bond market self-regulatory body overseen by the People’s Bank of China, also urged market participants to strengthen internal compliance in its statement on Friday.
The yield on China’s 10-year government bonds was little changed at 2.27% on Monday after the PBOC kept its benchmark rate unchanged and withdrew liquidity from the financial system for a second month. Futures on the 10-year note rose 0.2% to a new record high.
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