The "Counterintuitive" Logic of RMB Appreciation Leading to Higher Bond Yields

With devaluation pressure high, monetary authorities take measures to hedge against it, and counterparties provide leverage, lending money to the authorities.

These counterparties will make two trades: shorting RMB futures and holding RMB bonds. The income comes from two parts: swap points paid by the authorities and bond coupons.

If the maturity matches well, it's pure fixed income. However, some are imperfectly hedged, for example, greedily holding long-term bonds to fill the spot-holding segment, facing liquidation issues.

It is unclear how much long-term debt was bought to hedge against devaluation pressure. If the swap market fluctuates sharply, these long-term bonds may be aggressively sold off in the market.