China's PBOC Liquidity Injection and Its Implications for Fixed-Income Markets

The People's Bank of China (PBOC) has been a relentless force in 2025, deploying a barrage of liquidity injections to stabilize its financial system and signal its commitment to growth. From a jaw-dropping 1 trillion yuan outright reverse repo in June to a 600 billion yuan medium-term lending facility (MLF) in August, the central bank has shown no hesitation in flooding the market with cash. But here's the question: How are these moves translating into bond yields and investor behavior? Let's break it down.

The PBOC's Liquidity Blitz: A Game of Precision

The June 2025 reverse repo operation was no ordinary maneuver. By injecting 1 trillion yuan with a three-month tenor, the PBOC not only addressed immediate liquidity gaps but also sent a clear message: “We're here to support the economy.” According to a report by Chinadaily, this intervention coincided with a 0.35% surge in the most actively traded 30-year treasury bond futures, while bond yields dipped slightly, reflecting reduced borrowing costs for the government and corporates PBOC injects more liquidity to spur growth^[1].

The August MLF operation, meanwhile, was a calculated move to counteract a wave of government bond issuances and maturing interbank certificates of deposit. Data from Yuantrends highlights that the 600 billion yuan injection, paired with 361.2 billion yuan in reverse repos, aimed to “stabilize market expectations amid rising medium-term rates” PBOC Injects 600 Billion Yuan: What This Major MLF Operation …^[2]. The result? A modest easing in the 10-year government bond yield to 1.78% by August 25, though it had risen 0.04% over the prior month PBOC Injects 600 Billion Yuan: What This Major MLF Operation …^[2].

Transmission to Bond Yields: A Delicate Balancing Act

The PBOC's liquidity injections have had a nuanced impact on the yield curve. While short-term repo rates have fallen due to ample liquidity, long-term yields remain under upward pressure from fiscal stimulus and economic recovery bets. As noted by Bloomberg, the 10-year yield's 0.39% decline year-on-year contrasts with its 0.04% monthly rise, underscoring the central bank's struggle to flatten the curve without triggering a bond market bubble PBOC Injects 600 Billion Yuan: What This Major MLF Operation …^[2].

This tension is further complicated by the PBOC's regulatory interventions. In 2024, it cracked down on speculative trading in long-dated bonds, a move that has left investors wary of aggressive yield compression. Invesco's analysis suggests that while liquidity injections lower short-term costs, the PBOC's “anti-bubble” stance has curbed speculative flows, keeping long-term yields from plummeting Chinese onshore bonds: Understanding policy signals and market structure^[4].

Investor Positioning: Foreigners Extend Duration, Institutions Hedge

Foreign investors have been recalibrating their portfolios in response to the PBOC's actions. By June 2025, foreign holdings of Chinese bonds had rebounded to $587 billion, a recovery from the March 2023 low of $429 billion PBOC Injects 600 Billion Yuan: What This Major MLF Operation …^[2]. However, August saw a three-month decline to 2.01 trillion yuan ($282 billion), as capital shifted toward equities like the CSI 300 Index PBOC Injects 600 Billion Yuan: What This Major MLF Operation …^[2].

What's driving this shift? The UBS China Fixed Income Fund offers a clue. With a portfolio duration of 6.28 years—slightly longer than the benchmark's 5.90 years—foreign investors are extending maturities to lock in yields amid low global rates China Bonds: Diversification potential beyond the Dollar - UBS^[6]. Yet, this optimism is tempered by caution. Eurizon SLJ Capital predicts 10-year yields could rise to 1.75–2.00% in 2025, prompting a gradual, rather than abrupt, adjustment in duration China Bonds: Diversification potential beyond the Dollar - UBS^[6].

Domestically, institutional investors are adopting defensive strategies. Wall Street Examiner notes a surge in put buying and a shift from net long to net short equity futures, reflecting a “risk-off” sentiment as geopolitical tensions and U.S. QT policies loom Chinese onshore bonds: Understanding policy signals and market structure^[4].

The Road Ahead: Will the PBOC Keep the Spigots Open?

The PBOC has hinted at more liquidity support, including potential reserve requirement ratio (RRR) cuts and government bond purchases. Crédit Agricole's Xiaojia Zhi argues that the central bank's early June intervention—departing from its usual end-of-month schedule—was a signal to calm markets ahead of a 4.2 trillion yuan CD maturation Chinese onshore bonds: Understanding policy signals and market structure^[4].

However, the PBOC's hands are tied by global and domestic headwinds. A flattening yield curve, weak property sector, and U.S.-China trade jitters mean further easing could be constrained. As Bloomberg puts it, “The PBOC is walking a tightrope between growth and stability” PBOC Injects 600 Billion Yuan: What This Major MLF Operation …^[2].

Conclusion: A Market in Flux, But Opportunities Abound

For fixed-income investors, the PBOC's liquidity injections present a mixed bag. While yields remain attractive relative to U.S. Treasuries, structural risks—like low foreign ownership and regulatory crackdowns—demand a cautious approach. The key takeaway? Diversify across durations, sectors, and geographies. As the PBOC continues its balancing act, those who adapt to its signals may find themselves on the right side of the next move.