(Bloomberg) -- China’s central bank has advised some regional lenders to curtail their ultra-long bond investments to mitigate risks, people familiar with the matter said.

City and rural commercial banks in at least two eastern provinces were instructed in recent weeks to avoid significant exposure to these securities, the people said, asking not to be identified as the information is private. 

Under the guidance from local branches of the People’s Bank of China, the regional banks have also been asked to reduce duration and leverage on bond holdings, the people said.

The PBOC has stepped up efforts to cool the rally in long-term sovereign bonds, signaling intentions to correct any mismatch between market prices and the economic outlook. The latest directive follows similar guidance to rural lenders earlier this month to cap their exposure to ultra-long debts.

 

Markets have reacted to the message with a selloff in sovereign bonds, with investors also moving funds to chase a rebound in Chinese equities. China’s 30-year debt yield climbed above 2.59% Monday, set for the highest level in more than two months. Ten-year government bond yields have risen more than 10 basis points over the past three sessions, which included a trading day on Sunday.

China’s central bank didn’t immediately respond to a request for comment.

Investors have been drawn to sovereign notes this year, betting that the central bank will ease monetary policy to support an economy grappling with sluggish demand and a property crisis. 

China’s credit growth continued to slow in March and banks extended fewer loans than expected. The PBOC’s maintaining of an easy liquidity condition has provided traders with more funds to allocate to bonds. China’s local credit yields have fallen to the lowest level ever as investors snap up corporate bonds. 

Bonds have also benefited from large purchases by wealth management funds and haven demand from local institutions. The yield on 30-year sovereign debts has been declining for four straight quarters, and is hovering near a 20-year low amid insufficient credit demand and abundant liquidity.

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