Finance
China’s bond market intervention reveals financial stability worries
People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018.
Jason Lee | Reuters
BEIJING — China’s latest efforts to stem a bond market rally reveals wider worries among authorities about financial stability, analysts said.
Slow economic growth and tight capital controls have concentrated domestic funds in China’s government bond market, one of the largest in the world. Bloomberg reported Monday, citing sources, that regulators told commercial banks in Jiangxi province not to settle their purchases of government bonds.
Futures showed prices for the 10-year Chinese government bond tumbled to their lowest in nearly a month on Monday, before recovering modestly, according to Wind Information data. Prices move inversely to yields.
“The sovereign bond market is the backbone of the financial sector, even if you run a bank-driven sector like China [or] Europe,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis.
She pointed out that in contrast to electronic trading of the bonds by retail investors or asset managers in Europe, banks and insurers tend to hold the government bonds, which implies nominal losses if prices fluctuate significantly.
The 10-year Chinese government bond yield has abruptly turned higher in recent days, after falling all year to a record low in early August, according to Wind Information data going back to 2010.
At around 2.2%, the Chinese 10-year yield remains far lower than the U.S. 10-year Treasury yield of nearly 4% or higher. The gap reflects how the U.S. Federal Reserve has kept interest rates high, while the People’s Bank of China has been lowering rates in the face of tepid domestic demand.
“The problem is not what it shows [about a weak economy],” Garcia-Herrero said, but “what it means for financial stability.”
“They have [Silicon Valley Bank] in mind, so what that means, corrections in sovereign bond yields having a big impact on your sovereign balance sheet,” she continued, adding that “the potential problem is worse than SVB and that’s why they’re very worried.”
Silicon Valley Bank collapsed in March 2023 in one of the largest U.S. bank failures in recent times. The company’s struggles were largely blamed on shifts in capital allocation due to aggressive rate hikes by the Fed.
PBoC Governor Pan Gongsheng said in a speech in June that central banks need to learn from the Silicon Valley Bank incident, to “promptly correct and block the accumulation of financial market risks.” He called for special attention to the “maturity rate mismatch and interest rate risk of some non-bank entities holding a large number of medium and long-term bonds.” That’s according to a CNBC’s translation of his Chinese.
Zerlina Zeng, head of Asia credit strategy, CreditSights, noted that the PBoC has increased intervention in the government bond market, from increased regulatory scrutiny of bond market trading to guidance for state-owned banks to sell Chinese government bonds.
The PBoC has sought to “maintain a steep yield curve and manage risks arising from the concentrated holding of long-end CGB bonds by city and rural commercial banks and non-bank financial institutions,” she said in a statement.
“We do not think that the intention of the PBOC’s bond market intervention was to engineer higher interest rates, but to guide banks and non-bank financials institutions to extend credit to the real economy rather than parking funds in bond investments,” Zeng said.
Insurance hole in the ‘trillions’
Stability has long been important for Chinese regulators. Even if yields are expected to move lower, the speed of price increases pose concerns.
That’s especially an issue for Chinese insurance companies that have parked much of their assets in the bond market — after guaranteeing fixed return rates for life insurance and other products, said Edmund Goh, head of China fixed income at Abrdn.
That contrasts with how in other countries, insurance companies can sell products whose returns can change depending on market conditions and extra investment, he said.
“With the rapid decline in bond yields, that would affect the capital adequacy of insurance companies. It’s a huge part of the financial system,” Goh added, estimating it could require “trillions” of yuan to cover. One trillion yuan is about $140 billion USD.
“If bond yields move lower slower it will really give some breathing space to the insurance industry.”
Why the bond market?
Insurance companies and institutional investors have piled into China’s bond market partly due to a lack of investment options in the country. The real estate market has slumped, while the stock market has struggled to recover from multi-year lows.
Those factors make the PBoC’s bond market intervention far more consequential than Beijing’s other interventions, including in foreign exchange, said Natixis’ Garcia-Herrero. “It’s very dangerous what they’re doing, because losses could be massive.”
“Basically I just worry that it will get out of control,” she said. “This is happening because there [are] no other investment alternatives. Gold or sovereign bonds, that’s it. A country the size of China, with only these two options, there’s no way you can avoid a bubble. The solution isn’t there unless you open the capital account.”
The PBoC did not immediately respond to a request for comment.
China has pursued an economic model dominated by the state, with gradual efforts to introduce more market forces over the last few decades. This state-led model has steered many investors in the past to believe Beijing will step in to stem losses, no matter what.
The news of a local bank canceling a bond settlement “came as a shock to most people” and “shows the desperation on the Chinese government side,” said abrdn’s Goh.
But Goh said he didn’t think it was enough to affect foreign investor confidence. He had expected the PBoC to intervene in the bond market in some form.
Beijing’s yield woes
Beijing has publicly expressed concerns over the speed of bond buying, which has rapidly lowered yields.
In July, the PBoC-affiliated “Financial News” criticized the rush to buy Chinese government bonds as “shorting” the economy. The outlet later diluted the headline to say such actions were a “disturbance,” according to CNBC’s translation of the Chinese outlet.
Chang Le, fixed-income senior strategist at ChinaAMC, pointed out that the Chinese 10-year yield has typically fluctuated in a 20 basis-point range around the medium-term lending facility, one of the PBoC’s benchmark interest rates. But this year the yield hit 30 basis points below the MLF, he said, indicating the accumulation of interest rate risk.
The potential for gains has driven up demand for the bonds, after such buying already outpaced supply earlier this year, he said. The PBoC has repeatedly warned of risks while trying to maintain financial stability by tackling the lack of bond supply.
Low yields, however, also reflect expectations of slower growth.
“I think poor credit growth is one of the reasons why bond yields have moved lower,” Goh said. If smaller banks “could find good quality borrowers, I’m sure they would rather lend money to them.”
Loan data released late Tuesday showed that new yuan loans categorized under “total social financing” fell in July for the first time since 2005.
“The latest volatility in China’s domestic bond market underscores the need for reforms that channel market forces toward efficient credit allocation,” said Charles Chang, managing director at S&P Global Ratings.
“Measures that enhance market diversity and discipline may help reinforce the PBOC’s periodic actions,” Chang added. “Reforms in the corporate bond market, in particular, could facilitate Beijing’s pursuit of more efficient economic growth that incurs less debt over the long term.”
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
Sign up for our weekly newsletter that goes beyond the livestream, offering a closer look at the trends and figures shaping the ETF market.
New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
What that means for consumer loans
Checks and Balance newsletter: Of God and MAGA
Why software stocks, 2026’s market dogs, have joined the rally
Armanino adds Strategic Accounting Outsourced Solutions
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
