SHANGHAI China's central bank said on Monday it would borrow treasury bonds from some primary dealers soon, outlining the specifics of a plan analysts say is aimed at putting a floor under plunging domestic interest rates.

The People's Bank of China said it would borrow the bonds in open market operations in the near future, setting the stage for possible treasury bond selling, a new tool that will help the central bank control credit flow and market yields.

The country's sovereign bonds have been on a long rally this year, with yields hitting record lows, as a wobbly economy and volatile stock markets pushed savers into fixed-income safe haven investments.

Those declines in yields, which move inversely to bond prices, have heightened concerns among policymakers that sharp speculative moves could trigger financial instability.

PBOC governor Pan Gongsheng hinted at the Lujiazui Forum last month that the central bank might soon start trading in the secondary bond market.

"The move means the central bank will likely sell treasury bonds via open market operations soon," said Ming Ming, an economist at Citic Securities.

"Selling bonds at a time when 10-year treasury yields have fallen to historic lows can help ward off interest rate risks."

Yields on China's 10-year which have fallen 35 basis points (bps) so far this year, rose six bps to 2.275% following the statement, while 30-year treasuries, rose nearly seven basis points.

A 30-year treasury ETF managed by Pengyang Asset Management dropped 1.2%, the largest one-day decline since late April.

Unlike other major central banks, the PBOC does not hold scheduled monetary policy meetings. It guides interest rates through its medium-term funding operations and short-term repo transactions, and uses bank reserve requirements to manage cash conditions.

PBOC's move to borrow and trade bonds would improve its ability to steer market expectations, said Fan Qianghua, investment director at Cypress Investment Management Co.

The PBOC said in an online statement it will ensure stability in the country's bond market and its plan was "based on prudent observation and evaluations of current market situations".

The central bank said in May that it would sell low risk debt including government bonds when necessary, while paying close attention to current bond market changes and potential risks.

The PBOC bought bonds in 2007 for the creation of the sovereign wealth fund China Investment Corp.

The bank only holds 1.52 trillion yuan worth of bonds, about 5% of the treasury bonds in circulation and 1.4% of all the local bond holdings worth US$14.6 trillion by Chinese entities.

"When the central bank starts selling, it will increase the scale of tradable treasury bonds in the market, meaning activating a larger supply," said Xing Zhaopeng, senior China strategist at ANZ. "The central bank's move will set a bottom line for treasury yields."

  - Reuters