China’s big state banks sold seven-year government bonds in large sizes Thursday morning, traders said, in a sign the authorities’ fight against a record debt rally is escalating.

The selloff was focused on some of the most active seven-year notes, said the traders, who asked not to be identified as the information was private. The yield on the bonds surged as much as five basis points, the most since April, before paring some gains.

Earlier this week, big state banks were seen selling 10-year bonds after a rally that sent benchmark yields to fresh record lows.

“Recent momentum may have caused policymakers to start to push back amid concerns for a bond market bubble, with state owned banks selling possibly cooperating with these efforts,” said Lynn Song, chief economist for Greater China at ING Groep NV. “If necessary, next steps could include borrowing bonds to sell on the market and further verbal intervention.”

A battle between the central bank and government-bond buyers has intensified this week - authorities refrained from injecting short-term cash for the first time since 2020 but investors still pushed yields to record lows at an auction. Late on Wednesday, China said it was probing four rural commercial banks for manipulating prices in the secondary market.

The saga underscores the dilemma Beijing is in: while it has to support the moribund economy by keeping funding costs low, it has to make sure money isn’t so cheap that a bond bubble is formed that jeopardizes financial stability.

At least so far, traders seem to be betting that the People’s Bank of China will prioritize boosting growth over meddling in the bond market. Government notes are emerging as the biggest winners the financial markets this year, as everything from stocks to corporate notes and to residential property is seen as too risky amid a sluggish economy.

Benchmark yields plummeted below 2.1% for the first time in history this week, down some 40 basis points from the end of last year.

The selling by state banks on Thursday may have wrong-footed some traders, who once saw seven-year notes as a sweet spot given appealing yields and lower chance of official intervention.

Looking ahead, analysts aren’t optimistic that the pushback can yield long-term results, given Beijing is expected to cut interest rates further to stimulate growth.

“These steps mostly address the symptom rather than the cause,” Song said. “The interventions seem more likely to have a short term impact, while the longer term trend will be unaffected unless there are improvements in risk appetite.”

  - Bloomberg