Investors pile into Chinese special treasury bonds

Investors are going crazy for 30-year government bonds.

On Friday, the finance ministry (MoF) issued RMB 40 billion worth of 30-year bonds, the first batch of RMB 1 trillion special treasury bonds (STBs) it plans to issue this year.

• The bonds were sold with a coupon of 2.57%, the same yield at which 30-year general government bonds closed the previous day.

On Wednesday, the bonds started trading on the Shanghai and Shenzhen stock exchanges. Demand for the bonds is sky-high:

• In Shanghai, prices rose 13% a minute after the market opened, triggering a trading halt. Once trading resumed, prices continued rising, triggering a second halt later in the day.
• The Shenzhen exchange also halted trading twice.

With demand so high, yields on the bonds fell.

• Yields on bonds traded on the Shanghai exchange ended the day at 2.5070%, while those traded on the Shenzhen exchange ended at 1.7256% (The Paper).

ICYDK: The yield on 30-year government bonds has declined significantly this year, which the PBoC attributes to a shortage of high-quality assets.

Get smart: The shortage of high-quality assets is driven by:

• Weak household and corporate credit demand, leading banks to park capital in government bonds
• Falling deposit rates, driving savers out of banks and into bonds

Our take: In China, the novelty of a new financial product sometimes causes prices to surge beyond rational explanation.

• STB yields will soon align with the rest of the market.
• But long-dated bond yields will remain low even as STB issuance picks up.