China’s treasury futures hit new highs on Thursday, whilst long-dated yields approached record lows as investors continued to pour money into bonds, disregarding repeated risk warnings from the central bank.

Official data showed that the assets of Chinese bond mutual funds reached a record 6.5 trillion Yuan ($894.3 billion) in May, a 40% increase from the previous year. This rise indicates that lower deposit rates are prompting savers to invest in fixed income products amid stock market volatility.

The bond bull run in China reflects investor pessimism about an economy facing challenges such as a real estate crisis, local government debt issues, and increased geopolitical risks, Reuters news agency reports.

At a conference this week, Su Gang, chief investment officer at China Pacific Insurance Group, stated that markets generally agree that China's interest rates will trend lower.

“We’re in the midst of a long cycle that we’ve never experienced before …. and the market lacks confidence,” Gang said.

The ongoing decline in yields, which move opposite to bond prices, is challenging the determination of the People’s Bank of China (PBOC) to temper enthusiastic bond purchasing that it views as a risk to financial stability.

Yet despite these warnings, investors have persisted in pushing up bond prices this week. China’s 30-year treasury futures for September delivery increased by around 0.3% on Thursday morning, reaching a record high, while 10-year bond futures also reached new peaks.

Meanwhile, China’s 10-year treasury yield has fallen below the critical 2.3% threshold and is nearing the April low of 2.205%. The 30-year yield has also dropped below 2.5%, a level that had raised concerns about potential central bank intervention.

In addition, according to central bank data, Chinese corporate demand deposits fell to a two-year low of 52.98 trillion Yuan in May, marking a significant 7.1% decline from the previous year, the largest fall on record. 

Whilst in May, assets of bond mutual funds surged to a record 6.5 trillion Yuan, marking a 40% increase from 4.6 trillion Yuan the previous year. 

Furthermore, banks, hesitant to lend in a shaky economy, are increasingly investing in Chinese government bonds, which are perceived as safe-haven assets. Smaller banks, with fewer high-quality clients to lend to, are more actively involved in purchasing bonds compared to major banks.

Commercial banks hold approximately 20.3 trillion Yuan worth of Chinese government bonds in the interbank market, representing 71% of the total holdings.