China’s New Sovereign Bond Prices Go Haywire Amid Search for Safe Assets

China’s new 30-year sovereign bonds have seen whipsawing trade in the two days since their debut, with buying data suggesting small investors are hungry for safe-haven assets, as the country struggles with an ongoing property crisis and uncertain equities markets.

The bonds, sold by China’s Ministry of Finance, were released to institutional investors late last week and began trading on the Shanghai and Shenzhen stock exchanges on Wednesday.

Then the fireworks began.

Trading records on financial data provider Wind showed that the price of the bonds surged more than 13% within their first minute of trade in Shanghai, triggering a trading halt. When trading resumed midmorning, prices kept climbing to as much as a 25% gain, lifted by a series of small trades ranging from the equivalent of $16,571 to more than $230,000 in less than a 10-minute span, triggering a second halt that lasted for much of the day.

When trading resumed a few minutes before the close, two large sell orders of more than $2.8 million each slashed the price back to par.

The bonds ended Wednesday 1.3% higher at 101.32, and fell closer to par on Thursday. At their peak, they had an implied yield of 1.53%, lower than the yield of one-year Chinese government bonds and the two-year deposit rate offered by Chinese banks.

The Shenzhen-listed bonds, for their part, charted a similar course but over two days. The bonds closed almost 20% higher on Wednesday, then retreated Thursday to close at 100.65.

The volatile trading was likely partly because typically only a small portion of Chinese sovereign bonds was made available to retail investors to trade, so a single transaction could cause a large price move.

Much of the 30-year sovereign bonds are listed on China’s interbank bond market, available only to institutional investors such as banks, analysts say. No one knows exactly how much of the sovereign bonds were made available to retail investors, but in the past, only about 3% of China’s sovereign bonds were traded on the two exchanges, according to data from China Central Depository & Clearing compiled by Wind.

“Given poor market liquidity, some speculative traders may manipulate prices and sell to retail investors,” ANZ Research analyst Zhaopeng Xing said.

The demand for safe assets in China has risen since last year as the country faces a slowing economy, ongoing property crisis and volatile stock market.

Institutional investors and retail investors are seeking safe and liquid assets, given low inflation and a slow economy, Saxo Bank chief China strategist Raymond Wong said. “China government bonds are safe and liquid.”

The 40 billion yuan ($5.52 billion) of 30-year special sovereign bonds was the first batch of CNY1 trillion of notes that the government plans to issue this year. Proceeds will be used to boost business activities and reach Beijing’s ambitious economic growth goal of around 5% this year.

Write to Jiahui Huang at [email protected] and Rebecca Feng at [email protected]