(April 24): The People’s Bank of China (PBOC) ramped up its verbal pushback against the rally in long-term government bonds, warning of a reversal and hinting that a mismatch between market prices and the economic outlook will be corrected.

The central bank is optimistic about China’s long-run growth prospects, and yields “will be within a reasonable range that matches the economic outlook,” the PBOC-backed Financial News reported on Tuesday, citing an interview with an unidentified official in charge of a relevant department at the policymaker. That’s the case despite a temporary deviation between the two that’s been driven by supply and demand, the report added.

Markets reacted to the message with a selloff in government bonds. Futures on China’s 30-year debt closed down 1.1%, the worst loss on record since their debut a year ago. Cash bonds also fell, with the 10-year sovereign yield rising three basis points and the 30-year yield up by four.

The comments followed other recent signs that the authorities are growing uncomfortable about the relentless declines in yields. Regulators have stepped up efforts to cool the rally through a slew of measures but long-term yields remain on track to test the record lows set about two decades ago.

Investors have piled into bonds due to a variety of factors including China’s dovish monetary policy, haven demand from local institutions and a shortfall in debt supply. Chinese sovereign bonds have outrun major global peers in the past three months, with 10-year and 30-year yields now in the rare position of trading at a discount to the PBOC’s key policy rate.

While lower funding costs in the bond market may benefit borrowers including the government, there’s also concern the situation might backfire on bond bulls. In the report, the unnamed PBOC official cited as a lesson the case of SVB Financial Group, the US lender trapped by a liquidity crisis last year when its heavy wagers on longer-dated US bonds were squeezed by Federal Reserve rate hikes.

“Investors should be highly aware of interest rate risks” and those holding heavy long-duration bond positions — particularly leveraged ones — might face larger losses amid rising volatility, the PBOC official told the newspaper. Meanwhile, banks and insurers should avoid locking large amounts of funds into long-duration bonds at excessively low yield levels, as the returns may not be able to cover funding costs should the latter start to rise, the report said.

The report also responded to recent market discussion of potential PBOC bond trading in the secondary market, after a comment by President Xi Jinping spurred speculation of a shift in central bank tools. China will stick to normal monetary policy, and the PBOC’s buying and selling of government bonds is “completely different” from the quantitative easing operations conducted by others, the report said.