The latest round of issuance comes as Beijing looks to ramp up spending to defend the economy from the onslaught of 145% US tariffs on Chinese goods, which can make Beijing's 5% growth target for 2025 hard to achieve.
Thursday's issuance consisted of 165 billion yuan of 5-year special bonds to fund bank capital injection for state-owned banks struggling with thin profit margins amid the economic malaise. China plans to sell a total of 500 billion yuan of such bonds by June 4.
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The 5-year notes were sold at an average yield of 1.45%, according to a trader who bids at the government debt auctions.
Also on offer on Thursday were 50 billion yuan and 71 billion yuan of 20- and 30-year special bonds, respectively. Those are part of the 1.3 trillion yuan of 20-, 30- and 50-year ultra-long special sovereign notes that will be offered though October.
The total issuance quota of ultra-long special sovereign bonds this year is higher than the 1 trillion yuan sold last year. Proceeds from the sale will be used for financing consumer goods purchases, building major infrastructure projects and encouraging businesses to update equipment.
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The 20-, 30-year notes were priced at 1.98% and 1.88%, said the trader who isn't allowed to speak publicly. The bid-to-cover ratio for these bonds exceeded three times, in a sign of strong investor demand, the trader said.
The special bond issuance results were in line with market expectations, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. "The government is accelerating the pace of fiscal policy support to offset the tariff shock."
Despite the impending supply of bonds, the market is showing no signs of stress as some expect the PBOC to cut interest rates or the amount of cash banks must keep in reserve this year to bolster growth. The benchmark 10-year bond yield just around five basis points shy of a record low touched in February.
China's overnight repo rate hovered around 1.6% on Thursday, the lowest since January, in a sign of ample cash levels to help cushion the increased debt supply.
"We expect a supply peak in the next couple of months and People's Bank of China will keep liquidity steady," said ANZ's Xing.
The PBOC may to use tools such as outright reverse repurchase agreements to manage liquidity, Xing said, adding that "It could also consider resuming buying of government bonds or cutting the required reserve ratio to inject liquidity at proper time."
